Introduction to Account rotate Mitts ttt ty Google™ hen two teams par up for 2 game of fatal there often alot of nse The band plas, the fans cheer, and frewos gh up the scoreboard. Obvious, the fans ae com mite and care about the outcome ofthe gar. Just be aris at 2 foatbal game, the anes of usnes wan th buses $n agai thei comets the matpace. While having your foot team win canbe a source of pride winning in the maskztplace goes bayond pride and has many ‘angle benefits. Companies tha te winners ate beter able to sve csomers, Provide good jobs for employees, and rake mney for ther unas, ‘One sch sucestl company 1 ooo ne ofthe mest vsble arpa nes onthe ntret May of us cannot vist the Web without eng Goage to power a search. As one writer ad, "Google the closes ting the Wed as to an ultimate answer machine” And yt, Googe 's. fe tol—eo one aks fr your cet cad when you use oodles seach toi De you think Googe hasbeen a successful company? Does Itmake money? How would you know? Accounting Feps v0 anser these questions. Google's accounting iforatio tls that Google i a successful company that makes at of money, But ot fom you and me. Google makes its money from advertises Th tetbook invodices you 10 axcouming, the language of txxnes. Chactr 1 begins by escussing what 2 bushes: is ow operas, andthe roe that accounting ply,Chepter2 AnalyzingTrensactons 91 Instructions 1. Record the above transactions directly in the following T accounts, without journalizing- Cash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes Payable; Accounts Payable; Leila Durkin, Capital; Professional Fees; Rent Expense; Salary Expense; Blueprine Expense; Automobile Expense; Miscellaneous Expense. To the left of the amount entered inthe accounts, ple the appropriate eter to dently the transaction. 2. Determine account balances of the T accounts. Accounts containing a single entry only (such as Prepaid Insurance) do not need a balance. 3. Prepare an unadjusted trial balance for Leila Durkin, Architect, as of May 31, 2012. 4, Determine the net income or net loss for May. on 1234 PR2-2A Journal entries and trial balance ee costes ie mae eo B+ ese: Pald rent on office and equipment for the month, $3,750. Purchased supplies on account, $1,100. Paid creditor on account, $400. Eamed sales commissions, receiving cash, $16,750, Paid automobile expenses (including rental charge) for month, $1,000, and miscet- lancous expenses, $700. Paid office salaries, $2,150, hh, Determined that the cost of supplies used was $600. LWithdrew cash for personal use, $1,000. Instructions 1. Journalize entries for transactions (@) through @, using the following, account tiles: ‘Cash; Supplies: Accounts Payable; Faith Schultz, Capital; Faith Schultz, Drawing; Sales Commissions; Rent Expense; Office Salaries Expense; Automobile Expense; Suppl Expense; Miscellaneous Expense. Explanations may be omitted. 2, Prepare T accounts, using the account tides in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the leansactions. Determine the account balances, after all posting is complete. Accounts containing only a single entry do not need a balance. 3. Prepare an unadjusted trial balance as of October 31, 2012, 4, Determine the following. 4 Amount of total revenue recorded in the ledger. . Amount of total expenses recorded in the ledger. Amount of net income for October. 5. Determine the increase or decrease in owner's equity for October. PR2-3A Journal entries and trial balance (On April 1, 2012, Kathleen Alvarez established an interior decorating business, latex Designs. During the month, Kathleen completed the following transactions related t0 the business Apr. 1. Kathleen transferred cash from a personal bank account to an account to be used for the business, $17,000. 2, Paid rent for period of April 2 to end of month, $3,400. 6. Purchased office equipment on account, $10,000. 8 Purchased a used truck for $21,000, paying $2,000 cash and giving a note payable for the remainder, 10, Purchased supplies for cash, $1,800. 12, Received cash for job completed, $13,000.92 Chapter? Analyzing Transactions 8.1.23 ¥ 4 Total of Debit ‘column: $259,600 Ape. 15. Paid annual premiums on property and casualty insurance, $1,800, 23. Recorded jobs completed on account and sent invoices to customers, $9,000. 24, Received an invoice for truck expenses, to be paid in April, $1,000. Enter the following transactions on Page 2 ofthe two-column journal. 29. Paid utilities expense, $1,500 29, Paid miscellaneous expenses, $750. 30. Received cash from customers on account, $7,800. 30. Paid wages of employees, 4,000. 30, Paid ereditor a portion of the amount owed for equipment purchased on, April 6, $2,500. 30. Withdrew cash for personal use, $2,000. Instructions 1, Jourmalize each transaction in a two-column journal beginning on Page 1, referring tothe following chart of accounts in selecting the accounts to be debited and credited. (Do aot insert the account numbers in the journal at this time.) Explanations may be omitted. 11 Cosh 31 Kathleen Avaez Capital 12 Account Recehable 532 Kathleen Avarez Crewing 13 Supplies 4) Fees Eamad| 14 Prepaid insurance 51 Wages Expense 16 Equipment 153 Rent Expense 18 Track 54 Usities Expense 21 Notes Payable 22 Aecounte Payable 2. Post the journal to a ledger of four-column accounts, inserting appropriate posting, references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted, 3. Prepare an unadjusted tral balance for Intrex Designs as of April 30, 2012. 4, Determine the excess of revenues over expenses for April 5. Cam you think of any reason why the amount determined in (4) might not be the net income for Apa BIAS TIONS 147.103 55 Truck Expense 59 MicelaneousExpence PR2-4A Journal entries and trial balance ‘Utopia Realty acts as an agent in buying, selling, renting, and managing real estate. The ‘unadjusted tral balance on October 31, 2012, is shown below. Realty a Baance "october, 2012 Debit Great Bslonces Balances WW Giin i uh 13.150 12 Accounts Receivable : : 30750 14 Office Supplies avi : ‘00 16 Land. ie 21 Accounts Payable, 7000 22 Uncamed Rent is 23. Notes Payable = 31 lan Rogstad, Capt : 23,000 32 fan Rogstad, Orang 100 41 Fees Earned 51 Saoryand Commission Expense 52 RentBxpense 53 Adverting Expense 4 Automobile Expente 59 Wiuceluncous Expense, 120000‘The following business transictions were c 2012: Now. 1 2 . 10. 15, wv. 20, 23, CChapter2 Analyzing Transactions 93 Teted by Utopia Realty during November Paid rent on office for month, $5,000. Purchased office supplies on account, $1,300, Paid annual insurance premiums, $3,600. Received cash from clients on account, $25,000. Purchased land for a future building site for $90,000, paying $10,000 in cash and giving a note payable for the remainder. Paid creditors on account, $4,500. Returned a portion ofthe office supplies purchased on November 2, receiving {ull credit for their cost, $200. Paid advertising expense, $2,000. Enter the fllowing transactions on Page 19 of the two-coluran journal. 2. BSSERR Discovered an error in computing a commission; received cash from the sales- person for the overpayment, $1,000. Paid automobile expense (including rental charges for an automobile), $1,500. Paid miscellaneous expenses, $450. [Recorded revenue exrned and billed to clients during the month, $30,000. Pai salaries and commissions for the month, $7,500. Withdrew cash for personal use, $1,000, ‘ented land purchased on November 15 to local merchants association for use as a parking lot in December and January, during a street rebuilding pro ‘gram; received advance payment of $3,000. Instructions 1. Record the November 1, 2010, balance of each account in the appropriate balance columa of a four-columa account, write Balance inthe item section, and place a check mark (7) in the Posting Reference column, 2, Joumalize the transactions for November in a two-column journal beginning on Page 18. Journal entry explanations may be omitted. 3. Post to the ledger, extending the account balance to the appropriate balance column afer each posting 4, Prepare an unadjusted tral balance of the ledger as of November 30, 2012. 5. Assume that the November 30 transaction for salaries and commissions should have been $5,700. (@) Why did the unadjusted ial balance in (4) balance? (b) Journalize the comecting entry. (€) Is this error a transposition or slide? ons. PR2-5A Errors in trial balance V7-Total of Debit If the working papers correlaring with this textbook are not used, omit Problem 2-54, «column: $43,338.10 The following records of A-Aall Electronic Repair are presented in the working papers: + Journal containing entries for the period May 1-31, + Ledger to which the May entries have been posted. + Preliminary tral balance as of May 31, which does not balance. Locate the errors, supply the information requested, and prepare a corrected trial bak ance according t0 the following instructions. ‘The balances recorded in the accounts as fof May 1 and the entries in the journal are correctly stated. If is necessary to correct any posted amounts in the ledger, 2 line should be drawn through the erroneous figure land the correct amount inserted above. Corrections or notations may be inserted on the preliminary trial balance in any manner desired. Its not necessary to complete all of the Instructions if equal tral balance 1 is can be obtained earlier, However, the requirements of instructions (6) and (7) should be completed in any event. Instructions 1. Verify the totals ofthe preliminary tril balance, inserting the correct amounts in the schedule provided in the working papers (Cominued)94 Chapter Analyzing Transactions 1 1-Total of Debit column: $1,400,000 2. Compute the difference between the tral balance total 3. Compare the listings in the tial balance with the balances appearing in the ledger, and list the errors in the space provided in the working papers 4, Verify the accuracy of the balance of each account in the ledger, and list the errors in the space provided in the working papers 5. Trace the postings in the ledger back to the journal, using small check marks 10 identify items traced. Correct any amounts in the ledger that may be necessitated by fervors in posting, and list the errors in the space provided in the working papers. 6. Journalize as of May 31 the payment of $100 for advertising expense. The bill had been paid on May 31 but was inadvertently omitted from the journal. Post to the ledger. GRevise any amounts necessitated by posting this entry.) 7. Prepare a new unadjusted trial balance. PR2-6A Corrected trial balance Imperial Carpet has the following unadjusted rial balance as of March 31, 2012, Imari co madrid a Balance ‘arch Debit Creat flances _Salances Suppis 16690 Prepaid insurance 3600 Eguipment se So 7 2000 Notes Payable. 200000 ‘Accounts Payable foe 7 4.000 Leenarée Pepin, Capita. - 254300 Leonatde Pepin Drawing 16000 Fees Earned, 38300 Wages Expense 490000 Rent Expense 1134600 averting Expense so.400 Miscellaneous Expense 10200 Tre650 508300, ‘The debit and credit totals are not equal as a result of the following errors: ‘The balance of cash was understated by $12,000, A cash receipt of $13,900 was posted as a debit to Cash of $19,300. A debit of $15,000 to Accounts Receivable was not posted, A retum of $90 of defective supplies was erroneously posted as a $900 credit 10 Supplies . An insurance policy acquired at a cost of $2,500 was posted as a credit t0 Prepaid Insurance. £. The balance of Notes Payable was understated by $35,200. {A credit of $7,600 in Accounts Payable was overlooked when determining the balance of the account 1h. A debit of $10,000 for a withdrawal by the owner was posted as a credit to Leonardo Pepin, Capital 4. The balance of $116,200 in Rent Expense was entered as $112,600 in the tial balance. j. Gas, Fleetiity, and Water Expense, with a balance of $48,300 was omitted from the ‘rial balance, Instructions 1, Prepare a corrected unadjusted trial balance as of March 31, 2012. 2, mmm Does the fact that the unadjusted trial balance in (1) is balanced mean that there are no errors in the accounts? ExplainUsername: Alan LopezBook: Financial Accounting, 12th Edition. No part of any book may be reproduced or transmitted in any form by any means without the publishers prior written permission, Use (other than pursuant to the qualified fair use privilege) in violation of the law or these Terms of Service is prohibited. Violators will be prosecuted to the full extent of the law. CChapter2 Analyzing Transactions 95 a) uae om.123 PR2-18 Entries into accounts and tial balance {¥3.Total of Debit April Layton, an architect, opened an office on June 1, 2012. During the month, she Column: $74,700 completed the following transactions connected with het professional practice: 1. Transferred cash from a personal bank account to an account to be used for the busi- nes, $25,000, b, Purchased used automobile for $24,000, paying $5,000 cash and giving. a note payable for the remainder. ©. Pald June rent for office and workroom, $2,000, 4. Paid cash for supplies, $1,450. Purchased office and computer equipment on account, $8,000. Paid cash for annual insurance policies on automobile and equipment, $3,600. 8. Received cash from a client for plans delivered, $10,500, hb i k L Paid cash to creditors on account, $1,750. Paid cash for miscellaneous expenses, $600. Received invoice for blueprint service, due in July, $1,500, Recorded fee eared on plans delivered, payment to be received in July, $12,600. Paid salary of assistant, $1,600, ‘m. Paid cash for miscellaneous expenses, $200. ‘8. Paid installment due on note payable, $350. 6. Paid gas, oil, and repairs on automobile for June, $550, Instructions 4, Record the above transactions directly inthe following T accounts, without journaling: ‘Gash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes Payable; Accounts Payable; April Layton, Capital; Professional Fees; Rent Expense; Salary Expense; Blueprint Expense: Automobile Expense; Miscellaneous Expense. To the left of ‘each amount entered in the accounts, place the appropriate letter to identify the transaction. 2, Determine account balances of the T accounts. Accounts containing a single entry only (uch as Prepaid Insurance) do not need a balance. 3. Prepare an unadjusted trial balance for April Layton, Architect, as of June 30, 2012. 4, Determine the net income or net loss for June 081234 PR 2-28 Journal entries and trial balance 1 4.6,$5,500 (On March 1, 2012, Mitch Quade established Marine Realty, which completed the follow: ing transactions during the month: B Mitch Quade transferred cash from a personal bank account f0 an account to be used for the business, $18,000. Purchased supplies on account, $1,200. Eamed sales commissions, receiving cash, $14,000, |. Paid rent on office and equipment for the month, $3,000. Paid creditor on account, $750. ‘Withdrew cash for personal use, $2,000. Paid automobile expenses (including rental charge) for month, $1,500, and miscet Taneous expenses, $400. Paid office salaries, $2,800 Determined that the cost of supplies used was $800. Instructions 1, Journalize entries for transactions (a) through (D, using the following account titles: ‘Cash; Supplies, Accounts Payable, Mitch Quade, Capital; Mitch Quade, Drawing; Sales Commissions; Rent Expense; Office Salaries Expense; Automobile Expense; Supplies Expense; Miscellaneous Expense. Journal entry explanations may be omitted, ph ging ier na nn pa rp ge an grt tas MYO)96 Chapter? oBn1234 1 3-Total of Creat ‘column: $64,500 ‘Analyzing Transactions 2. Prepare T accounts, using the account titles in (2). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the ‘wansactions. Determine the account balances, after all posting is complete. Accounts containing only a single entry do not need a balance. 43. Prepare an unadjusted tral balance as of March $1, 2012 4. Determine the following: ‘4. Amount of total revenue recorded in the ledger. bb. Amount of total expenses recorded! in the ledger. ‘6 Amount of net income for March. '5, Determine the increase or decrease in. owner's equity for March PR2-36 Journal entries and trial balance On July 1, 2012, Kim Wheeler established an interior decorating business, Aztec Designs. uring the month, Kim completed the following transactions related to the business Joly 1. Kim transferred cash from a personal bank account to an account t0 be used forthe business, $21,000. 4. Paid reat for period of July 4 to end of month, $2,750. 10, Purchased a used truck for $18,000, paying $4,000 cash and giving a note pay able for the remainder. 13, Purchased equipment on account, $9,000. 14, Purchased supplies for cash, $1,500. 15, Paid annual premiums on property and casualty insurance, $3,600. 15, Received cash for job completed, $12,000. Enter the following transactions on Page 2 ofthe two-column journal, 21, Paid creditor a portion of the amount owed for equipment purchased on July 13, $2,000. 24, Recorded jobs completed on account and sent invoices to customers, $9,800. 26, Received an invoice for truck expenses, to be paid in August, $700. 27. Paid utilities expense, $1,000. 27, Paid miscellaneous expenses, $300. 29, Received cash from customers on account, $4,600. 30, Paid wages of employees, $2,800, 31, Withdrew cash for personal use, $2,500, Instructions 1. Jounalize each transaction in a tvo-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Journal entry explana tions may be omited 11 Cosh 31 Kim iheder, Capital 12 account Recenable 432 Kimvesle, ring 13 Supplies 4 Fees Eamed 14 Prepld insurance 51 Wages Expense 16 Equipment 153 Rent Expense 18 Track 54 Usities Expense 21 Notes Payable 55 TruckEspense 22 Aecounte Payable ‘59 miscellaneous Expense 2, Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance Columns after each transaction i posted, 3. Prepare an unadjusted tal balance for Aztec Designs as of July 31, 2012 4, Determine the excess of revenues over expenses for July. 5. Can you think of any reason why the amount determined in (4) might not be the net income for July?CChapter2 Analyzing Transactions 97 0811234 PR2-4B Journal entries and trial balance 1¥-4.Total of Debit Prime Time Realty acts as an agent in buying, selling, renting, and managing real estate. column: $575,400 The unadjusted tral balance on July 31, 2012, is shown below. 2 “ a s Prime He Realty Gah ‘Aecounteacehable Prepaid Insurance Office Suples = Land = ‘Accounts Paya 12000 Uneamed Rent = Notes Payable s Sendy Uc Capital ee | e000 Sendy neh, rowing. 25600 Fees ame 334000 Salary and Commission Expense ‘ S 220000 ent Expense ‘Advertsing Expense ‘Automobile Expense Micallaneous Expense, ‘0000 ‘The following business transactions were completed by Prime Time Realty during August 2012: Aug. 1. Purchased office supplies on account, $1,800. Paid rent on office for month, $5,000. Received cash from clients on account, $40,000. Paid annual insurance premiums, $6,000, Returned a portion of the office supplies purchased on August 1, receiving {all credit for their cost, $400. 17, Paid advertising expense, $5,500. 225, Paid creditors on account, $7,000, Enter the following transactions on Page 19 of the ruo-colunn journal. 29, Paid miscellaneous expenses, $500. 30. Paid automobile expense (including reatal charges for an automobile), $2,500. 31. Discovered an error in computing a commission; ecelved cash from the salesperson for the overpayment, $8,000, 31. Paid salaries and commissions for the month, $18,000. 31. Recorded revenue earned and billed to cients during the month, $112,000, 31. Purchased land for a future building site for $75,000, paying $10,000 in cash, and giving a note payable for the remainder. 31, Withdrew cash for personal use, $12,000. 31. Rented land purchased on August 31 to local university for use asa park- ing lot during football season (September, October, and November; received advance payment of $4,000. Instructions 1 2 Record the August 1 balance of each account in the appropriate alance column of a fourcolumn account, write Balance in the item section, and place a check mark () in the Posting Reference column. Jouralize the transactions for August in a two-column journal beginning on Page 18. Journal entry explanations may be omitted. 3: Post to the ledger, extending the acount balance tothe appropriate balance column sp hg ge i lp i EO98 Chapter? Analyzing Transactions 1 7-Total of Creat column: $43,338.10 1. Tota of Debit column: $285,000, 4. Prepare an unacljsted tral balance of the ledger as of August 31, 2012, 5. Assume that the August 31 transaction for Sandy Ulrich’s cash withdrawal should have been $1,200. (a) Why did the unadjusted trial balance in (4) balance? (b) the correcting entry. (€) Is this error a transposition or slide? PR2-SB Errors in tril balance Journalize 1 the working papers correlating with this textbook are not used, omit Problem 2-5B. ‘The following records of A-Aall Electronic Repair are presented in the working papers: + Jounal containing entries for the period May 1-31, + Ledger to which the May entries have been posted, + Preliminary tral balance as of May 31, which does not balance. Locate the errors, supply the information requested, and prepare a corrected trial bal ance according to the following instructions. The balances recorded in the accounts a5, fof May 1 and the entries in the journal are correctly stated. If itis necessary any posted amounts in the ledger, a line should be drawn through the erroncous figure and the correct amount inserted above. Corrections of notations may be inserted on the preliminary trial balance in any manner desired. Its not necessary f0 complete all of the Instructions if equal trial balance totals can be obtained earlier. However, the requirements of instru 1 (6) and (7) should be completed in any event Instructions 1, Verify the totals of the preliminary trial balance, inserting the correct amounts in the schedule provided in the working papers. 2. Compute the difference between the tral balance totals. 374575 29,30 43. Compare the listings in the tial balance with the balances appearing in the ledger, and list the errors in the space provided in the working papers. 4, Verity the accuracy of the balance of each account in the ledger, and list in the space provided in the working papers. the errors 5. Trace the postings in the ledger back to the journal, using small check marks to identify items traced. Correct any amounts in the ledger that may be necessitated by terrors in posting, and list the errors in the space provided in the working Papers. 6, Journalize as of May 31 the payment of $275 for gas and electricity. The bill had been ppaid on May 31 but Was inadvertently omitted from the journal. Post to the ledger. (Revise any amounts necessitated by posting this entry) Prepare a new unadjusted trial balance. PR2-6B Corrected trial balance lite Video has the following unadjusted tral balance as of October 31, 2012 tte video ri Balance “October31, 2012 ‘Debit tances ca 1.100 Accounts Receivable... tn 17860 Supplies 2520 Prepaid Insane soso gre tao Equipment. ‘4900 Notes Pyable. ‘Accounts Payable ‘ime Desan, Copia ‘Ase Desant Drawing 1400 Fees Earned a foe Wages Expense 123400 Rent Expense . vse 25020 ‘Advertsing Expense 130 (as, lc, and Water Expense 7 200 “ret stances 31.600 39140 213600CChapter2. Analyzing Transactions 99 ‘The debit and credit (otals are not equal as a result of the following errors: b 4 i ‘The balance of cash was overstated by $7,500. A cash receipt of $7,200 was posted as a debit to Cash of $2,700, [A debit of $5,000 to Accounts Receivable was not posted. ‘A retum of $350 of defective supplies was erroneously posted as a $530 credit 10 Supplies. An insurance policy acquired at a cost of $1,000 was posted as a credit to Prepaid Insurance, ‘The balance of Notes Payable was overstated by $10,000. A credit of $500 in Accounts Payable was overlooked when the balance of the account ‘was determined. A debit of $4,000 for a withdrawal by the owner was posted as a debit to Aimee Desanti, Capita ‘The balance of $11,340 in Advertising Expense was entered as $13,140 in the trial balance, Miscellaneous Expense, with a balance of $1,840, was omitted from the tral balance. Instructions 1 2. Prepare a corrected unadjusted trial balance as of October 31 of the current year. = Does the fact that the unadjusted trial balance in (1) is balanced mean that there are no errors in the accounts? Explain, Continuing Problem ‘The transactions completed by PS Music during June 2012 were described at the end of Chapter 1. The following transactions were completed during July, the second month of the business’: operations: July 1, Pat Sharpe made an additional investment in PS Music by depositing $4,000 1 4.Total of Debit ‘column: $40,030 in PS Music's checking account. 1. Instead of continuing to share office space with a local real estate agency, at decided to rent office space near a local music store. Paid rent for July, $1,800. Paid a premium of $2,700 for a comprehensive insurance policy covering li- ability, theft, and fre. The policy covers a one-year period. Received $1,250 on account. (on behalf of PS Music, Pat signed a contract with a local radio station, WHBD, to provide guest spots for the next three moaths. The contract re- quires PS Music to provide a guest disc jockey for 80 hours per month for 4 monthly fee of $3,600. Any additional hours beyond 80 will be billed to WHIBD at $40 per hour. In accordance with the contract, Pat received $7,200 from WHBD 2s an advance payment for the fist two months. 3. Paid $250 on account. 4, Paid an attorney $800 for reviewing the July 3rd contract with WHBD, (Record as Miscellaneous Expense.) 5. Purchased office equipment on account from One-Stop Office Mat, $6,000. 8. Paid for a newspaper advertisement, $200. 11. Received $900 for serving as a disc jockey fora party 13. Paid $600 to a local audio electronics store for rental of digital recording equipment. 14, Paid wages of $1,200 to receptionist and part-time assistant.100 chapter2 Analyzing Transactions Enter the following transactions on Page 2 ofthe two-column journal, 16, Received $2,100 for serving as a dise jockey for a wedding reception. 18, Purchased supplies on account, $1,080. 21. Paid $620 to Upload Musi for use of ts current music demos in making vari ‘ous music sets. 2, Paid $800 co a local radio station to advertise the services of PS Music twice daily forthe remainder of July. 23. Served as dise jockey for a party for $2,500. Received $750, with the remain der due August 4, 2012 27. Paid electric bill, $760. 28. Paid wages of $1,200 to receptionist and parttime assistant, 29. Paid miscellaneous expenses, $370. 30. Served asa dise jockey for a chacty ball for $1,800, Received $400, with the remainder due on August 9, 2012. 31. Received $2,800 for serving as a disc jockey for a party. 31. Paid $1,400 royalties (music expense) to National Music Clearing for use of various artists’ music during July 31. Withdew $1,500 cash from PS Music for personal use, PS Music's chart of accounts and the balance of accounts as of July 1, 2012 (all normal balances), are as follows: 1 Gh $5310 41 Fees Earned $6650 12 Accounts Recelvable 1250 50 Wages Expense 00 14 Supplies 70 51 Offce Rent Expense 750 15 Propaid surance — 52 Equipment Rent Expense 700 17 Offie Equipment = 53 Uniibes Expense 200 21 Accounts Payable 250 ‘54 Music Expense 1580 23 Uneatned Revenue = 55. Advertsing Expense ‘50 31 Pat Sharpe, Capital 5000 56 Supolies Expense 10 232 Pat Sharpe, Drawing 500 59 Miscelaneous Expense 200 Instructions 1, Enter the July 1, 2012, account balances in the appropriate balance column of a four- column aecount, Write Balance in the Item column, and place a check mark (7) in the Posting Reference column. (int: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2, Analyze and joumnalize each transaction in a two-column journal beginning on Page 1, ‘omitting journal entry explanation. 3. Post the journal to the ledger, extending the account balance to the appropriate bal- ance column after exch posting. 4, Prepare an unadjusted tral balance as of July 31, 2012. eae ¢P2-1 Ethics and professional conduct in business Av the end of the current month, Jonni Rembert prepared a tial balance for Star Rescue Service. The credit sie of the tial balance exceeds the debit side by a significant amount. Jonni has decided to add the difference to the balance of the miseellaneous expense ac- ‘count in order to complete the preparation ofthe current month’s financial statements by a 5 o'clock deadline. Jonni will look for the difference next week when she has more Hie. a Discuss whether Jonnt is behaving in a professional manner,Introduction to Account rotate Mitts ttt ty Google™ hen two teams par up for 2 game of fatal there often alot of nse The band plas, the fans cheer, and frewos gh up the scoreboard. Obvious, the fans ae com mite and care about the outcome ofthe gar. Just be aris at 2 foatbal game, the anes of usnes wan th buses $n agai thei comets the matpace. While having your foot team win canbe a source of pride winning in the maskztplace goes bayond pride and has many ‘angle benefits. Companies tha te winners ate beter able to sve csomers, Provide good jobs for employees, and rake mney for ther unas, ‘One sch sucestl company 1 ooo ne ofthe mest vsble arpa nes onthe ntret May of us cannot vist the Web without eng Goage to power a search. As one writer ad, "Google the closes ting the Wed as to an ultimate answer machine” And yt, Googe 's. fe tol—eo one aks fr your cet cad when you use oodles seach toi De you think Googe hasbeen a successful company? Does Itmake money? How would you know? Accounting Feps v0 anser these questions. Google's accounting iforatio tls that Google i a successful company that makes at of money, But ot fom you and me. Google makes its money from advertises Th tetbook invodices you 10 axcouming, the language of txxnes. Chactr 1 begins by escussing what 2 bushes: is ow operas, andthe roe that accounting ply,Chapter 1 business entity concept, Chris Glark’s personal assets, such as home or personal bank account, and personal liabilities are excluded from the equation, Now. 5, 2011 NetSolutions paid $20,000 for the purchase of land as a future building site ‘The land is located in a business park with access to transportation facilites, Chris Clark plans to rent office space and equipment during the first phase of the busi ness plan. During the second phase, Chris plans to build an office and a warehouse con the land, 2IAST ASNTS 147. 10.415.36 ‘The purchase of the land changes the makeup of the assets, bur it does not change the total assets. The items in the equation prior to this transaction and the effect of the transaction are shown below. The new amounts are called balances Assets] = [_Owner'sEqui ash + Land |_| Chris Clark capital fal. 25000 1 aso00 'b. -20000 +2000 Bat. 5000 35000 Nov, 10, 2011 NetSolutions purchased supplies for $1,350 and agreed to pay the ‘supplier in the near future. ‘You have probably used a credit card to buy clothing or other merchandise. In this type of transaction, you received clothing for a promise to pay your credit card bill in the future. That is, you received an asset and incurred a liability to pay a future Dill. Nee-Solutions entered into a similar transaction by purchasing supplies for $1,350, ‘and agreeing to pay the supplier in the near furure, This type of transaction is called 48 purchase on account and is often described as follows: Purchased supplies on ac- ‘count, $1,350. ‘The liability created by a purchase on account is called an account payable. Items ‘such as supplies that will be used in the business in the future are called prepaid ‘expenses, which are assets. Thus, the effect of this transaction is to increase assets (Supplies) and liabilities (Accounts Payable) by $1,350, as follows: Assets = {Liabilities + Owners Equity ‘Recounts + Chris Clark, Cosh + Supplies + Land Payable Capitl sal, 5100 20000 25,00 . 380 #1380 Bal 5000 1350 70000 13505000 Nov. 18, 2011 NetSolutions received cash of $7,500 for providing services to ‘customers. ‘You may have earned money by painting houses or mowing lawns. If so, you received, money for rendering services to a customer, Likewise, a business ears money by selling goods or services to its customers This amount is called revenue, During its first month of operations, NetSolutions received cash of $7,500 for providing services to customers. The receipt of cash increases NetSolutions’ assets and also increases Chris Clark's equity in the business. The revenues of $7,500 are recorded in a Fees Earned column to the right of Chris Clark, Capital, The effect of this transaction is to increase Cash and Fees Earned by $7,500, as shown at the top of the next page Introduction to Accounting and Business 11 ‘Transaction B ‘Transaction C ‘Transaction D12 Chapter Introductionte Accounting and Business ‘Transaction E at: Assets = [Liabilities + Owners Equity ‘Recounts Chris Clark, Fees ‘cash + Supplies + Land |] payable + Capital + Earned fal, S000 1350 20,000 1380” 25,000 437500 — al 12500 1350 70000 135 5,000 300 Different terms are used for the various types of revenues. As illustrated above, revenue from providing services is recorded as fees earned. Revenue from the sale of merchandise is recorded as sales. Other examples of revenue include rent, which is recorded as rent revenue, and interest, which is recorded as interest Instead of receiving cash at the time services are provided or goods are sold, a business may accept payment at a later date, Such revenues are described as fees earned on account or sales on account. For example, if NetSolutions had provided services on account instead of for cash, transaction (@) would have been described as follows: Fees earned on account, $7,500. In such cases, the firm has an account receivable, which is a claim against the customer. An account receivable is an asset, and the revenue is eamed and recorded as if cash had been received. When customers pay their accounts, Cash increases and Accounts Receivable decreases Nov. 30, 2011 NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800, utilities, $450; and miscellaneous, $275. During the month, NetSolutions spent cash or used up other assets in earning, revenue. Assets used in this process of earning revenue are called expenss Expenses include supplies used and payments for employee wages, utilities, and other services. NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Miscellaneous expenses in- clude small amounts paid for such items as\ postage, coffee, and newspapers. ‘The effect of expenses is the opposite of revenues in that expenses reduce assets and owner's equity. Like fees earned, the expenses are recorded in columns to the right of Chris Clark, Capital. However, since expenses reduce owner's equi the expenses are entered as negative amounts. The effect of this transaction is shown below. Assets | = [Liabiities + Owner's Equity ‘counts ChisCark Fees Wages Rent” Uti Mis Cash + Supplies + Land |=] Payable + Capital + famed - Gap. ~ Exp. ~ ap. Be. 2500" 380" 20,00] "nso. "5000 7500 2128 7350 zo000) | 1350 © 5000 7500-225 -B00 450 50 Businesses usually record each revenue and expense transaction as it occurs. However, to simplify, NetSolutions’ revenues and expenses are summarized for the ‘month in transactions (@) and (. Nov. 30, 2011 NetSolutions paid creditors on account, $950. When you pay your monthly credit card bill, you decrease the cash in your checking, account and decrease the amount you owe to the credit card company. Likewise, when NetSolutions pays $950 to creditors during the month, it reduces assets and abilities, as shown at the top of the next page.‘Chapter Inttoduction to Accounting and Business 13 ‘Accounts Chris Clark, Fees Wages Rent Utlties Mise ash + Supplies + Land Payable + Captal | +Eamed- Exp. — Bip. - Exp. ~ Exp. Bal 8850 1,350 20,000 | 1350 25,000 7.500 -2125 800-450-275, Assets = | abilities + Owner's Equity me ae gee eet eee Bat 7900 7380 20000 400 250007500 “2128 “B00 450 Paying an amount on account is different from paying an expense. The paying of an expense reduces owner's equity, as illustrated in transaction (c). Paying an amount on account reduces the amount owed on a liability. Nov. 30, 2011 Chris Clark determined that the cost of supplies on band at the end Transaction G of the month was $550. ‘The cost of the supplies on hand (not yet used) at the end of the month is $550. ‘Thus, $800 ($1,350 ~ $550) of supplies must have been used during the month. This, decrease in supplies is recorded as an expense, as shown below. Assets abilities + Owner's Equity ‘Accounts Chris Clark, Fees Wages Rent Supplies Utitles Misc ash + Supplies + Land Payable + Capal “+ Eamed- Em. - Bp. - Bp. - Exp. — Exp, al 79001350 20000 ‘400 (25000-7800 -2125 800 450-275 6 00 ee aeeeeeeee erecta sete eam egaeeee eee fa. 7900, 070000, joc = «250007500 225-800-800 “A527 Nov. 30, 2011 Chris Clark withdrew $2,000 from NetSolutions for personal use. ‘Transaction H Ac the end of the month, Chris Clark withdrew $2,000 in cash from the business for personal use. This transaction is the opposite of an investment in the business by the owner. Withdrawals by the owner should not be confused with expenses. With: drawals do not represent assets or services used in the process of earning revenues Instead, withdrawals are a distbution of capital ro the owner, Owner withdrawals are identified by the owner's name and Drawing. For example, Chris Clark's withdrawal is identified as Chris Clark, Drawing. Like expenses, withdrawals are recorded in a column to the right of Chris Clark, Capital. ‘The effect of the $2,000 withdrawal is as follows: Assets = (Liabilities + Owner's Equity ‘Accounts Chis Gark, Chis Clark Fees Wages ‘Rent Supplies Uies Mise ash + Supp. + Land || Payable + Capital - Drawing + Eamed - xp. - Exp - Ep Exp. — Exp, Bal 7900550 20,000 "0025000, 7500 2125-800 600-450-275. 20000 ea =2000 seine paitageeravetieeeeetigaaataat Bat 5900 550 70,000 35000-2000 75002198 80000) aso “aS Summary The transactions of NetSolutions are summarized at the top of the next page. Each transaction is identified by letter, and the balance of each accounting ‘equation element is shown after every transaction. ‘You should note the following: 1. The effect of every transaction is an increase or a decrease in one or more of the ac cownting equation elements 2. The two sides of the accounting equation are always equal 3. The owner's equity is increased by amounts invested By the owner and is decreased by withdrawals by the owner. ta addition, the owner's equity is increased by revenues and is decreased by expenses,14 Chapter Introduction to Accounting and Business este Lables + Owner's Equity ‘counts ChisGark ChisClik Fees Wages Rent Supplies Uillies Mic Gosh + Supp. + Lond = Payable + Capital — Drawing +Eamed- Ep. — Gm. Bap Gp ~ x 425,000 425000 b-20.000 #20000 fal. 5000 720000 75000 « $1380 #1350 Bal, 5000 41350 “DODD 41350 “25000, 7207000 25000 7500 -2125 200 450-275 20900 138025900 7500 2125-800 aso 275 7090 40025000 7500 215-300 50 a9 800 200 oo 50 7500 3195 “ao “so | “aso “ars 2000 700 © 400) “25p0) ©2000 | 7500 ZI W800 -m) 4502 the four types of transactions affecting owner's equity are “EXHIBIT 5 Types of Transactions Affecting ‘Owner's Equity Net income (et Less Example Exercise 1-3 Salvo Delivery Service is owned and operated by Jol Salve. The following selected transactions were completed by Salvo Delvery Service during February: 1. Received cash from owmer as addtional Investment, $35,000. 2. Paid creditors on account, $1800. 43 Billed customers for delivery services on account, $11,250, 4 Received cash fom customers on account $6,740, Paid cash to owner for personal us, $1,000. Indicate the effect ofeach wansaction on the accounting equation elements (Assets, Labiities, Owner's Equity, Orawing, verve, and Expense). Also, indeate the spec em within the accounting equation element thats affected. To ‘strate, the answer to (1) shown below. (1) Asset (Cas) increases by $35,000; Owner's Equity Uoel Salvo, Capital increases by $35,000. eee) (2) Asset (Cash) decreases by $1800; Liability (Accounts Payable) decreases by $1,800. {G) Asset (Accounts Receivable) increases by $11,250; Revere (Delivery Service Fees) increases by $11,250 (4) Asset (Cash) increases by $6,740; Asset (Accounts Receivable) decreases by 56.740. (5) Asset (Cash) decreases by $1,000; Drawing Yoel Salvo, Drawing) increases by $1000. Practice Exercises: PE 1-3A, PE 1-38Chapter 1 Introduction to Accounting and Business 15 Financial Statements fran After transactions have been secorded and summarized, reports are prepared for users ed “The accountng reports providing this information are called financial statements. The opis ‘primary financial statemvenis of a proprietorship ae the income statement, the statement saieol ‘of owner's equity, the balance sheet, and the statement of cash flows. The order thatthe anes financial statements are prepared and the nature ofeach statement is described as follows, Order Prepared Financial Statement Description of statement 1. Income statement ‘Acura ofthe revenue and expences ora spec patadaftine suchasa month ora ea 2 Statement of owner's ‘Asurmary ofthe chagesin the owner equity hat ‘equity have occured cing ospecticperod time sacha 3 month oa yea, 3 Balancesheet ‘Absofthe aes ables, and owners equ asof aspecicdote usualy athe close of the ast day ofa month orayesn 4 Statement eashflows summary a the cash cept and cash pymentor a specicperodof tie, suchasa menth oa yea ‘The four financial statements and thei interrelationships are illustrated in Exhibit 6, fon page 17. The data for the statements are taken from the summary of transactions ff NetSolutions on page 14, All financial statements are identified by the name of the business, the title of the statement, and the date or period of time. The data presented in the income statement, the statement of owner's equity, and the statement of cash flows are for a period of time, The data presented in the balance sheet are for a specific date, Income Statement ‘The income statement reports the revenues and expenses for a period of time, No! based on the matching concept. This concept is applied by matching the expenses When revenes exced incurred during a period with the revenue that those expenses generated. The excess zene itisrefened of the revenue over the expenses is called net income, net proft, or carnings. Ir SAIN, | the expenses exceed the revenue, the excess is a net loss. When expenses exceed ‘The revenue and expenses for NetSolutions were shown in the equation as revenues, Risreferred separate increases and decreases. Net income for a period increases the owner's wasnetioss ‘equity (capital) for the period. A net loss decreases the owner's equity (capital) for the period. ‘The revenue, expenses, and the net income of $3,050 for NetSolutions are reported in the income statement in Exhibit 6, on page 17. The order in which the expenses are listed in the income statement varies among businesses. Most businesses list ‘expenses in order of size, beginning with the larger items. Miscellaneous expense is usually shown as the last item, regardless of the amount. ‘Te revenues and expenses of Chickadee Travel Service forthe year ended April 30,2012, relisted below. Foes eamed $263,200 Miscellaneous expense 12950 Office expense 63,000 Wages expense 131,700 Prepare an income statement forthe current year ended Api 302012, (Continued)16 chapter Introduction to Accounting and Business ges Chickadee Travel Service Income Statement For the Year Ended April 30, 2012, Fes eam oo Expenses: ‘Wages expense . office expense — Practice Exercises: PE 1-4, PE 1-48 Statement of Owner's Equity ‘The statement of owner's equity reports the changes in the owner's equity for a period of time. It is prepared after the income statement because the net income fr net loss for the period must be reported in this statement, Similarly, it is pre- pared before the balance sheet, since the amount of owner's equity at the end of the period must be reported on the balance sheet. Because of this, the statement of owner's equity is often viewed as the connecting link between the income state- ment and balance sheet. ‘Three types of transactions affected owner's equity of NetSolutions during November: 1. the original investment of $25,000, 2. the revenue and expenses that resulted in net income of $3,050 for the month, and 3. withdrawal of $2,000 by the owner. “The preceding information is summarized in the statement of owner's equity in Exhibit 6, Example Exercise 1-5 Using the income statement for Chickadee Travel Service shown in Example Exercise 1-1, prapare a statement of ‘owners equlty forthe yeat ended April 30, 2012. Adam Calin the owner invested an adational $50,000 In the business and withdrew cash of $30,000 for personal use during the year. The capital ofthe owner, Adam Celi, was $50,000 on May 1, 2011, the beginning ofthe current yar. eed Chickadee Travel Service Statement of Owner's Equity For the Year Ended April 30, 2012, ‘Adam Celi, capital, May 1, 2017 ne een $ 80,000 ‘Adaltional investment by owner dung year $ 50.000 Net income for the Year nomnannnnn ats 55550 5705350 Less withdrawals 30,000 Incresse in omer equity. 75550 ‘Adam Celi, capital, Ap 30, 2072. $155,550 Practice Exercises: PE 1-5A, PE1-5B Balance Sheet ‘The balance sheet in Exhibit 6 reports the amounts of NetSolutions’ assets, liabilities, and owner's equity as of November 30, 2011. The asset and lability amounts are taken from the last line of the summary of transactions on page 14. Chris Clark, Capitalchapter Inttoduction to Accounting and Business. 17 EXHIBIT 6 ey Perera’ Financial For the Month Ended November 30,2011 Statements for NetSolutions Fees ened. z ‘ eae $7500 Expenses: ‘Wages expense S225 Rentexpense cos.csseenie a C0 Supplies expense 00 etter expen f i 450 Miscellaneous expenses... annonce: ae Toalexpense 4430 Netincome Eat ‘NetSolutions: eee eeeor ny Perrier eT meee Pony ‘Chris capital November 12011 e $0 Investment on Noverbar 1, 2017... ene $25,000 Netincome for November 3050<¢———____1_] 525050 Less withdrawals. 22000 Increase in owners equity 25050 ‘Chia capital November 30,2011 326050 es pie November 30,2011 LUnbiiter ch 5 5900 Aecounts payable 5 400 Supplies 550 Owner Equity Land S55 20000 Chis Chr, capitals ecessennesn 2e00-<] Total ascets $25450_—_‘Totallaties and unersequlty 52540 ry Pere een iret Tear er rag] ‘Cash ows om operating activities ‘ashrecsved fom customers 5 7500 Deduct ath payment fo expenses and payments tocredtore 4600 Net cash low rom operating sctiites. 2)a900 ‘cash wes rom investing atv: ‘Gash payments for purchase of and ian (20,000) ‘cath ows fom fsncig neti ‘ash recsived 35 owners investment. eee $25,000 Deduct sch wltdawal by over 22000 Netcash lon rom nancig activites 4 Net cash flow and November 30, 201, ath balance z18 Chapter Introduction to Accounting and Business of balance sheet shown in Exhibit 6 is called the aceount form. This is because it resembles the basic format of the accounting equation, with assets on the left side nk len offers use and the liabilities and owner's equity sections on the right side. a business's ana ‘The assets section of the balance sheet presents assets in the order that they Samnensindecking ill be converted into cash or used in operations. Cash is presented firs, followed reese ae" by receivables, supplies, prepaid insurance, and other assets. The assets of a more Theloonisganted, permanent nature are shown next, such as land, buildings, ane! equipment. the torroner maybe In the liabilities section of the balance sheet in Exhibit 6, aecounts payable isthe feqitedie mintin® only lability. When there are two of more liabilities, each should be listed and the ‘can evel fasts amount of liabilities presented as follows: cain leafs, toxal amount of liabilities presented as fol The busines’ franca # as of November 30, 2011, is taken from the statement of owner's equity. The form fatemens ae ueed abilities ‘montor ts ee ‘Accounts payable $12,900 ‘Wages payable 2570 Total abilities 315470 ee aR Using the following data for Chickadee Travel Service as well asthe statement of owner's equity shown in Example yerelse 1-5, prepare a balance shoet a5 of Api 30, 2012, ‘Accounts recevable $31,380 ‘Accounts payeble 12200 cash 53050 and ‘80,000 Supplies 3350 deed Chickadee Travel Service Balance Sheet April 30, 2012 Acsets abilities cash $53,030 Accounts payable. $1220 AccOUNS e6@W—bIE ssseeseees 31350 Supplies ee 3.350 ‘Owner's Equity a 80,000 Adam Cefn capital coe _155,550 Total assets... $167,750 Tota abilities and owner's equity... 3167750, Practice Exercises: PE1-6A, PE 1-68 Statement of Cash Flows ‘The statement of cash lows consists of the following three sections, as shown Exhibit 6 1. operating activities, 2 investing activities, and 3. Financing activities, Each of these sections is briefly described below. Cash Flows from Operating Activities ‘his section reports a summary of cash receipts and cash payments from operations. The net cash flow from operating activities, rhommally difers from the amount of net income for the petiod. Ia Exhibit 6, NetSolutions 2 nates fof lnc set led he peo litrtadin pir preset he abr and cer coutyChapter 1 lntroduction to Accounting and Business 19 reported net cash flows from operating activities of $2,900 and net income of $3,050. This, difference occurs because revenues and expenses may not be recorded at the same time that eash is received from customers or paid to creditors Cash Flows from Investing Activities ‘Tis section report the cash transactions for the acquisition and sale of relatively permanent assets. Exhibit 6 report that NeSolutions paid $20,000 for the purchase of land during November. Cash Flows from Financing Activities This section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner. Exhibit 6 shows that Chris Clack invested $25,000 in the business and withdrew $2,000 during November. Preparing the statement of cash flows requires that each of the November cash transactions for NetSolutions be classified as an operating, investing, or financing activity. Using the summary of transactions shown on page 14, the November cash ‘transactions for NetSolutions are classified as follows: ‘transaction Amount __ Cash Flow Activity $25,000 Financing (investment by Chis Crt) "29.000 investing Purenate of lana) 7500 Operating (Fes eamed) “4650 Operating Payment of expenses) 950 Operating Payment of account payable) 2000 Financing (wathsawal by Ces Cla ‘Transactions (©) and (q) are not listed above since they did not involve a cash receipt or payment. In addition, the payment of accounts payable in transaction (Dis, classified as an operating activity since the account payable arose from the purchase of supplies, which are used in operations, Using the preceding classifications of Novem ber cash transactions, the statement of eash flows is prepared as shown in Exhibit 6. ‘The ending cash balance shown on the statement of cash flows is also reported fon the balance sheet as of the end of the period. To illustrate, the ending cash of $5,900 reported on the November statement of cash flows in Exhibit 6 is also reported as the amount of cash on hand in the November 30, 2011, balance sheet. Since November is NetSolutions’ first period of operations, the net cash flow for November and the November 30, 2011, cash balance are the same amount, $5,900, as shown in Exhibit 6. In later periods, NetSolutions will report in its statement of cash flows a beginning cash balance, an increase of a decrease in cash for the period, and an ending cash balance. For example, assume that for December NetSolutions has a decrease in cash of $3,835. The last three lines of NetSolutions’ statement of cash flows for December would be as follows: Decrease incach $3,835 Cth ae of December 1,201) 5,900 Casha of December 31,2011 52,065 [A summary of cashflows for Chickadee Travel Service forthe year ended Apri 30,2012 is shown below. Cash receipts Cash received from customers $251,000 Cash received from additional investment of owner 50.000 Cash payments Cash paid for expenses 210000 (lah pel fo aed tee ecePlseratetestvoneventesteaserlety eh 80,000 Cash paid to owner for personal use 30000 The cath balance as of May 1,2011, was $72,050, Prepare a statement of cash flows fr Chickadee Travel Service forthe year ended Apri 30,2012 Theat poping he stent ah low ice te ‘et ath Thi mata thn tod Sana ‘Shred fer nthe20° Chapter Introduction to Accounting and Business eked Chickadee Travel Service ‘Statement of Cash Flows For the Year Ended April 30, 2012 ‘Cash flows fom operating activities: Cash recived from customers $251,000, Deduct cash payments for expenses 20,000 Net cash flows fom operating activities. $41,000 Cath flows fom investing activites: Cash payments for purchase of land... (2,000) ‘cashflows fom financing aetvties: Cash receved from awner as investment. $ 50.000 Deduct cash withdrawals by owner 30000 Net cash flows from financing actives Net decrease in cash during year. ‘Cash as of May 1, 2011 Cash as of Api 30,2012 Practice Exercises: PE1-7A, PE 1-78 Interrelationships Among Financial Statements Financial statements are prepared in the order of the income statement, statement of owner's equity, balance sheet, and statement of cash flows. This order is im- portant because the financial statements are interrelated, These interrelationships jt 6 and are described below.” for NetSolutions are showa in Ex! Financial Statements terrelatonship NetSolutions Example (Exhibit 6) Netincome ontlosreperedon the oton net income of $3,050 ome Statement and Statement of Owners Equity income satementizainoeportedon the statement of owners cay a ether ae acation inet ncome| eo dection (net oss tom te begining overs ssxatyand ory addtonalinvestets bythe ome rng the period ‘Owner’ capital atthe ed ofthe petiod reported an the tatement of ‘owners equty sao reported onthe balance sheet 5 owe’ capital Statement oF Owners Equity andBelance Sheet lance Shest ad Statement of eh The cash ported an the balance sheets also reported asthe end of- period cash onthe statement of coh flows, for November added to Chris Clas Investsent of $2500 in the statement of onners equ ‘Cis Co, Capital of 26050. of November 30,2011, on the statement cof onners equity aso appears onthe November 30,201, balance sheet 3¢ (hus Cart Capital Cash of $5,900 reported onthe blncs sheet a of November 30,2011, 'salsoreported on the November sotement of eth flows a the enc oF evo cash, ‘The preceding interrelationships are important in analyzing financial statements and the impact of transactions on a business. In addition, these interrelationships serve as a check on whether the financial statements are prepared correctly. For example, if the ending cash on the statement of cash flows doesn't agree with the balance sheet cash, then an errof hi’ oeeiki€d 187-7905. S besa en he ratex ofrepng he ashfows tom opting aces etn of te sent of sh ows et nee {ernetirny at ppt arth nr ct Sows Teneusonip rath opp the aero ah fest aod decibel aaseteain per 8chapter Financial Analysis and Interpretation: Ratio of Liabilities to Owner’s Equity ‘The basic financial statements illustrated in this chapter are useful to bankers, credi- tors, owners, and others in analyzing and interpreting the financial performance and condition of a company. Throughout this text, various tools and techniques that are often used to analyze and interpret a company’s financial performance and condition are described and illustrated. The first such tool that is discussed is useful in analyz- ing the ability of a company to pay its creditors. ‘The relationship between liabilities and owner's equity, expressed as a ratio of abilities to owner's equity, is computed as follows: Ratio ofLiablties to Owner’ Equity ‘Total Liabilities Total Owners Equity (or Tota ‘Stockholders Equity) [NetSolutions’ ratio of liabilities to owner’s equity at the end of November is 0.015, as computed below, Ravioof abilities __$400 - 2% ~ ons to OwmersEquity ~ $26,050, Corporations refer to total owner's equity as total stockholders’ equity. Thus, total stockholders’ equity is substituted for total owner's equity when computing this ratio, To illustrate, balance sheet data (in millions) for Google Inc. and McDonalds Corporation are shown below. Dest, Dee. 31, 2009 2008 Google ine Tota abies $3529 § 2646 Tota stockholders equity 78239 22690 MeDona’s Corporation Total ibis sso stan Tota stockholder equity 15383 15.280 The ratio of liabilities to stockholders’ equity as of December 31, 2009 and 2008 for Google and McDonald's is computed below. Dec. 31, ee. 31, 2009 2008 Google “otal abilities $3529 5 2686 “otal stockholders equity 2329 22690 Ratio of labilties to stockholders’ equity 012 012 (63,529/528239) _($2646/522.680) [MeDonale’s Corporation “otal abies siso79 su4i2 “ota stockholders equity 13383 15,280 Ratio of lables to stoctholders" equity 13 092 (siso79/st3.aea) —(514112/515,280) ‘The rights of creditors to a business's assets come before the rights of the owners cr stockholders. Thus, the lower the ratio of liabilities to owner's equity, the better able the company is to withstand poor business conditions and pay its obligations to creditors. Google is unusual in that it has a very low amount of liabilities; thus, its ratio of liabilities to stockholders’ equity of 0.12 is small. In contrast, McDonald's has more Inroduction to Accounting and Business 21 Desc and usta the Tats to cwner’s equity in evaluating 3 company’s fran ‘concton22 chapter Introduction to Accounting and Business Liabilities; ts ratio of liabilities to stockholders’ equity is 1.13 and 0.92 on December 31, 2009 and 2008, respectively. Since McDonalds ratio of liabilities to stockholders ‘equity increased slightly from 2008 to 2009, its creditors are slightly more at risk on. December 31, 2009, as compared to December 31, 2008. Also, McDonald's creditors are more at risk than are Google's creditors. The ereditors of both companies are, however, well protected against the risk of nonpayment ‘The following data were taken from Hawthorne Company's balance sheet: Dec.31, Dee. 31, 2012" 2011 ‘ova ibiies $120.00 $105,000 Total overs equity ‘80000 75,000 ‘& Compute the ratio of lbilites to owner’ equity i. Has the creditor sk increased or decreased from December 31,2011, to December 31, 20122 nee) a Dec. 31, Dec. 31, 2012 2011 ‘otal abies $120,000 $105,000 Total owner's equity ‘30000 75000 Ratio of Habits to owner's equly 150 140 ($120.00/580.000) _($105,000/575,000) btncreased Practice Exercises: PE 1-8, PE 1-88 FRE (aa 9 SS emerson Key Points A business provides goods or services (outputs) to customers with the objective of eaming a profit. Three types of businesses include service, merchandising, and manufacturing businesses. Accounting is an information system that provides repors to users about the economic activities and condition of a business ihics are moral principles that guide the conduct of individuals, Good ethical conduct depends on individual character and firm culture ‘Accounlanis are engiged in private accounting oF pubic accounting ‘ample Practice crerises Exercises + Distinguish among service, merchandising, and manufacturing businesses, * Describe the role of accounting in business and explain why account ing is called the “language of business, + Define ethics and list the two factors affecting ethical conduct, + Describe what private and public accounting means,CChapter 1 troduction to Accounting and Business 23 inciples and relate them to practice. Key Points Generally acepted accounting principles (GAAP) are used in preparing financial statements Accounting principles and concepts develop from research, practice, and pronouncements of authonative bodies. ‘The buisiness entiy concept views the business as an entity separate from is owners, creditors, oF other businesses. Businesses may be organized as proprietorships, partnerships, corporations, and limited liability ‘companies. The cost concept requires that purchases of a business be recorded in terms of actual cost. The “objectivity concepe requires that the accounting records and tepons be hased on objective evidence, The unit of measure concept requires that economic data be reconded in dollars ie Selowen ‘ample Prastice | perme Eereises xertses + Explain what is meant by generally accepted accounting principles + Describe how generally accepted accounting principles are developed. + Describe and give an example of what is meant by the business centy concept + Describe the characteristics of a propectombip, partnership, corporation, and limited lability company + Desctlbe and give an example of what fs meant by the cost concept FELT | PELIA, 148 + Describe and give an example of what is meant by the objectivity concept + Describe and give an example of what is meant by the unit of measure concer, State the accounting equation and define each element of the equation. Key Points The resources owned by a business the form of an equation, as follows: 1 the rights or claims to these resources may be stated in Assets = Libilies + Owner's Bquiy aig euacaaae Trample Practice Leas xareaas raretses + State the accounting equation + Define assets, liabilities, and owners equity. + Given two elements of the accounting equation, solve for the third eee Describe and illustrate how business transactions can be recorded in terms ofthe resulting en eng reat etn on Key Points All business trinsactions cam be stated in terms of the change én one or more of the three ele ments of the accounting equation, ecleceoat ramp Practice Learning Exercises xerises + Define a business transaction + Using the accounting equation a8 a framework, record trinsaetions. EELS | PEI3A, 13824 chapter Introduction to Accounting and Business Describe the financial statements ofa proprietorship and explain how they interrelate. Key Points The primary financial statements of a proprietorship are the income statement, the statement of owner's equity, the balance shect, and the statement of cash flows. The income statement reports a period's net income oF net loss, which is also reported on the statement of owner's equity. The ending owner’ caps tal reported on the statement of owners equity is also reported on the balance sheet, The ending cash bal: ance is reported on the balance sheet and the statement of cash flows, Learning Outcomes + Ust and describe the financial statements of a proprietorship. + Prepare an income statement, PELAA, + Prepare a starement of owner's equity PELSA, Prepare a balance sheet PELGA, Prepare a statement of cash Hows, PELTA, LEsplain how the financial satements of a propritonhip ate intereated. Deen ee Key Points A ratio useful in analyzing the ability of @ business to pay is creditors isthe ratio of liabilities to owner's (sockholders) equity. ‘The lower the ratio of lables to owners equity, the better able the company is to withstand poor business conditions and pay ils obligations to creditors couae Trample Practice a Exoretes Exeretses + Describe the usefulness of the ratio of liabilities to owner's (stockholders) equity + Compute the ratio of labiliies to owner's (tockholders) equity EELS | PELSA, 185 account form (18) cost concept (8) fncome statement (15) account payable (1) ‘earnings (5) interest revenve (12) account receivable (12) ethics @) International Accounting accounting 3) ‘expenses (12) ‘Standards Board GASB) 7) accounting equation ©) fees earned (12) abies ©) assets (9) financial accounting (3) ited bitty company balance sheet 5) Financial Accouating Standards a0 @ Irusiness 2) ‘Board (FASB) management (oF manager) Sener) financial seatements (15) severing G) Inusiness transaction (9) ‘general-purpose financial par worree omed Cceried Public Accountant seotements 0) ee rere (cra) 6) -enerlly accepted accounting ‘merchandising business 2) pease on rinciples (GAAP) (6) ret income Cornet profit 15)‘chapter 1 Introduction to Accounting and Business 25, net loss 15) Securities and Exchange “objectivity concept 8) publi accounting (6) ‘Commission (SEO) owner's equity ©) ratio of liabilities to owner's service business @ partnership () (Geoekholders) equity (21) statement of cash flows (15) prepaid expenses (11) rent revenue (12) statement of owner's revenue (11) equlty 05) sales (12) unit of measure concept @) Ue TT Cecil Jameson, Attorney-at-Law, is a proprietorship owned and operated by Cecil Jameson, n July 1, 2011, Cecil Jameson, Attorney-at-Lav, has the following assets and liabilities, ‘ash, $1,000; accounts receivable, $3,200; supplies, $850: land, $10,000; accounts payable, $1,530, Office space and office equipment ate currently being rented, pending the con struction of an office complex on land purchased last Year. Business transactions during July are summarized as follows a. Received cash from clients for services, $3928 b. Paid creditors on account, $1,055, Received eash from Cecil Jameson as an additional investment, $3,700. 4. Paid office rent for the month, $1,200, . Charged clients for legal services on account, $2,025. , Purchased supplies on account, $245. 8 Received cash from clients on account, $3,000 h Received invoice for paralegal services from Legal Aid Inc. for July (to be paid on August 10), $1,635 |. Pald the following: wages expense, $850; answering service expense, $250; utliies ‘expense, $325; and miscellaneous expense, $75. j. Determined that the cost of supplies on hand was $980; therefore, the cost of sup. plies used during the month was $115. k. Jameson withdrew $1,000 in cash from the business for personal use. Instructions 1, Determine the amount of owner's equity (Cecil Jameson's capital) as of July 1, 2011. 2, state the assets, Habiltes, and owner's equity as of July 1 in equation form similar to that shown in this chapter. In tabular form below the equation, indicate the in- ‘creases and decreases resulting from each transaction and the new balances after ‘each transaction ‘3. Prepare an income statement for July, a statement of owner's equity for July, and a Dalance sheet as of July 31, 2011 4. (Optional. Prepare a statement of cash flows for July. Solution 1 Assets ~ Liabilities = Owner's Equity (Ceci Jameson, capital) (81,000 + $3,200 + $850 + $10,000) ~ $1,530 = Owners Equity (Cecil Jameson, capital) $15,050 ~ $1,530 = Owner's Equity (Cecil Jameson, capital) $13,520 = Owner’ Equity (Cecil Jameson, capital)26 Chapter Introduction to Accounting and Business 2 ests = Usbatee nner Eauity cok 4 Ree 4 Sepp 6 tana = “Pp Gp Oewg 4 Gimed Ep Bp SR Sp Bp Se fal goo 32085019000 158013520 pare) ae ‘45 5a as) Thom sos se sas "3300 a0 Tomo ws asa cr 41200 e es sams 23 190590000 595 “xo a Ce nd femme eset acy Fees camed Expense: Paralegal expense. Rent expense ages expense Uses expense Answering sence expense Suppbesexpense Mscolaneous expen. ‘Totalespenses. Pec ed Paar renin Seen EC $5950 suas 1200 #50 30 oct amazon capa 11,2011 ‘dona invest by owner. Ls wt Inert Incr’ eny {Cec ameson capa ly 31,2011 13520 e370 $5203 mm (conve)CChapter 1 troduction to Accounting and Business 27 Cocil Jamoson, Attornoy-at-Law parry ee) sete Usbites coh ceseiseess $6873 COUN payAIE soso $2385 ‘Accounts receivable ans ‘Owner's Equity Supplies 980 Cecil meson capt. we and 120600 Total abies and owner Total asets S2007s equity S20n78 4. Optional Cnr and Eero ney Ecce rire) cash flees rom operating actos (ash received fom customer soeess sos $6928" Deduct ash payments for operating expenses 3755 Net cash flows rom operating activites, sama ‘cash ows fom investing actives, pe ‘Cash lows fom fancing stv ‘Cash rece fom oune as investment $3700 Deduct cash withdrawals by own. "1000 Net cash ows fom fancing actives. 200 Netincreas2in cash during Year sos oe cso iss ‘Gashasef uly 1.2001 ‘00 (Cashasof ly 31, 201 a 53978 + 53.000 1035+ $1.200+ $1500, Discussion Questions 1. Name some users of accounting information. a 3 accepted the seller's counteroffer of $82,000. De- What is the role of accounting in business? EAST aSaCGLceoLelaatseaneneE Why ate most large companies like Microsoft, g Land with an assessed value of $400,000 for Pepsico, Caterpillar, and AutoZone organized as corporations? Murray Stoltz is the owner of Ontime Delivery Service. Recently, Murray paid interest of $3,200 fn a personal loan of $60,000 that he used to be- fin the business. Should Ontime Delivery Service record the interest payment? Explain 5. On October 3, A2Z Repair Service extended an of fer of $75,000 for land that had been priced for sale at $90,000. On November 23, A27 Repair Service property tax purposes is acquired by a busi ness for $525,000. Ten years later, the plot of land has an assessed valve of $700,000 and the business receives an offer of $1,000,000 for it Should the monetary amount assigned to the land in the business records now be increased? b. Assuming that the land acquired in (a) was sold for $1,000,000, how would the various el cements of the accounting equation be affected?28 Chapter 1_ Introduction to Accounting and Business 7. Describe the difference between an account re- ceivable and an account payable 8, A business had revenues of $430,000 and operating expenses of $615,000. Did the business (a) incur a1 net loss or (b) realize net income? 9. A business had revenues of $825,000 and operating expenses of $708,000. Did the business (a) incur aa net loss or (b) realize net income? 10, What particular item of financial or operating data appears oa both the income statement and the statement of owner's equity? What item appears fon both the balance sheet and the statement of owner's equity? What item appears on both the balance sheet and the statement of cash flows?CChapter 1 troduction to Accounting and Business 29 eta ae Caray cy oB1.2 sera pt PET-1A Cost concept ‘On June 10, Easy Repair Service extended an offer of $95,000 for land that had been priced for sale at $118,500. On August 2, Easy Repair Service accepted the seller's counteroffer ‘of $105,000, On August 27, the land was assessed at a value of $80,000 for property tax purposes. On April 1, Easy Repair Service was offered $125,000 for the land by’ national retail chain, At what value should the land be recorded in Easy Repair Service's records? PEI-1B Cost concept (On February 7, AAA Repair Service extended an offer of $50,000 for land that had been priced for sale at $65,000. On February 21, AAA Repais-Senice accepted the eller’ ‘counteroffer of $57,500. On April 30, the land was assessed at a value of $40,000 for property tax purposes. On August 30, AAA Repair Service was offered $90,000 for the land by a national retail chain. At what value should the land be recorded in AAA Repair Service's records? PET-2A Accounting equation Shannon Cook is the owner and operator of Galaxy LLC, a motivational consulting busi- ness. At the end of its accounting period, December 31, 2011, Galaxy has assets of {$800,000 and liabilities of $450,000. Using the accounting equation, determine the fol- lowing amou a. Owner's equity, as of December 31, 2011. , Owner's equity, as of December 31, 2012, assuming that assets increased by $175,000 and liabilities decreased by $60,000 during 2012. PE1-28 Accounting equation Jan Petr is the owner and operator of You're the One, a motivational consulting bust ‘ness. AE the end of its accounting period, December 31, 2011, You're the One has assets ‘of $575,000 and liabilities of $125,000. Using the accounting equation, determine the following amounts: a. Owner's equity, as of December 31, 2011. , Owners equity, as of December 31, 2012, assuming that assets increased by $85,000 and liabilities increased by $30,000 during 2012 PE1-3A Transactions ‘Queens Delivery Service is owned and operated by Lisa Dewar. The following selected transactions were completed by Queens Delivery Service during June: Received cash from owner as additional investment, $18,000. Paid creditors on account, $1,800. Billed customers for delivery services on account, $12,500, Received cash from customers on account, $6,900. Paid cash to owner for personal use, $4,000, Indicate the effect of each transaction on the aecounting equation elements (Assets, Li abilities, Owner's Equity, Drawing, Revenue, and Expense). Also, indicate the specifi item within the accounting equation element that is afected. To illustrate, the answer to @) is shown below. (1) Asset (Cash) increases by $18,000; Owner's Equity (Lisa Dewar, Capital) increases by $18,000.Chapter 1 Introduetion to Accounting and Business earning objects Exeees one cETa 5 opis FETA D6 ops EEL 16 ons EELS 216 ons eETs 516 ons cet 516 3B Transactions -Motorcross Delivery Service is owned and operated by Jim Smith. The following selected, transactions were completed by Motorcross Delivery Service during February Received cash from owner as additional investment, $30,000, Paid advertising expense, $1,200. Purchased supplies on account, $450. Billed customers for delivery services on account, $7,500, Received cash from customers on account, $4,900 Indicate the effect of exch transaction on the accounting equation elements (Assets, Li abilities, Owner's Equity, Drawing, Revenue, and Expense). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer t0 ) is shown below. (G) Asset (Cash) increases by $30,000; Owner's Equity (im Smith, Capital increases by $30,000. PE1-4A Income statement ‘The revenues and expenses of Dynasty Travel Service for the year ended June 30, 2012, are listed below. Fees eamed $980,000 Office expense 722000 Miscellaneous expense 16000 Wages expense 478000 Prepare an income statement for the current year ended June 30, 2012, PE 1-4B Income statement ‘The revenues and expenses of Escape Travel Service for the year ended November 30, 2012, are listed below, Fees eamed s912500 Office expense 391625 Miscellaneous expense 15875 Wages expense 562500 Prepare an income statement for the current year ended November 30, 2012 PET-5A Statement of owner's equity Using the income statement for Dynasty Travel Service shown in Practice Exercise 1-4, prepare a statement of owner's equity for the current year ended June 30, 2012, Nancy Coleman, the owner, invested an additional $60,000 in the business during the year and ‘withdrew cash of $36,000 for personal use. Nancy Coleman, capital 2s of July 1, 2011, ‘was $250,000. PE1-5B Statement of owner's equity Using the income statement for Escape Travel Service shown in Practice Exercise 1-48, prepare a statement of owner's equity for the eurrent year ended November 30, 2012. Brett Daniels, the owner, invested an additional $45,000 in the business during the year and withdrew cash of $25,000 for personal use. Brett Danicls, capital as of December 1, 2011, was $475,000, PE1-6A_ Balance sheet Using the following data for Dynasty Travel Service as well as the statement of owner's ‘equity shown in Practice Exercise 1-5A, prepare a balance sheet as of June 30, 2012.ons ere pe ons e172 ons ETT 2 ons ete 92 Chapter Introduction to Accounting and Business Accounts reenable $ 64000 ‘Accounts payable 24000 cash 155,000 Land 300.000 Supplies 12000 ET PE 1-68. Balance sheet Using the following data for Escape Travel Service as well as the statement of owner's ‘equity shown in Practice Exercise 1-5B, prepare a balance sheet as of November 30, 2012, Accounts reenable Sa4375 ‘Accounts payable 52300 Cash 36750 und 362800 Supplies 6375 PET-7A. Statement of cash flows A summary of cash flows for Dynasty Travel Service for the year ended June 30, 2012, is shown below. cance: Cash received from customers 920.000 Cosh received from alton investment of 60.000 cash payments Cash paid for operating expenses 710000 Cashpaidforland 203,000 (oth paid to owner for personal use 35,000 ‘The cash balance as of July 1, 2011, was $130,000. Prepare a statement of cash flows for Dynasty Travel Service for the year ended June 30, 2012 PE 1-78. Statement of cash flows ‘A summary of cash flows for Escape Travel Service for the year ended November 30, 2012, is shown below. ounces: Cosh received from customers 875.000 Cashreceived fom ational investment ofowmer 45,000, Cash payments: (esha for operating expenses 912500 ashi ori 67500 Cash aid to owner for personal use 25,000 ‘The cash balance as of December 1, 2011, was $141,750, Prepare a statement of cash flows for Escape Travel Service for the year ended No- vember 30, 2012. PE1-8A Ratio of liabilities to owner's equity ‘The following data were taken from White Company's balance sheet ee 31, 2012 _Dee.31,2011 “etal iabies $575000 $267,500, Totalownersequry 300000250000 &. Compute the ratio of liabilities to owners equity D. Has the creditor's risk increased or decreased from December 31, 2011 to December 31, 2012732 Chapter Introductionto Accounting and Business PE 1-88 Ratio of liabilities to owner's equity ‘The following data were taken from Stone Company's balance sheet: bec.31,2012 Bee. 31,2011 Teal abies ‘340900 §300000 Toulownersequty 500.000 400000 4. Compute the ratio of Hiabilites to owner's equity i, Has the creditors risk increased or decreased from December 31, 2011 to December 31, 20127 on1.2 C1 Types of businesses ‘The following is list of well-known comparis7® 21110103 147-70.1898 1. HaR Block 9, Procter &Gamble 2 eBayine 10. Feaex 3, WakMart stores, ne M1, Gapine. 4. Ford Motor Company 12, Hilton Hospitality, ne. 5. Chigroup 13. cvs 6. Boving 14, Caterpilar 7. Suntrust 15. TheDow Chemical Company 8. Alcoa ne. 4, Indicate whether each of these companies is primarily a service, merchandise, or ‘manufacturing business. If you are unfamiliar with the company, use the Internet to locate the company's home page or use the Finance Web site of Yalhoo (hitp://finance. yahoo.com). '. For which of the preceding companies is the accounting equation relevant? EX 1-2. Professional ethics A fertilizer manufacturing company wants to relocate to Jones County. A. report from 42 fred researcher at the company indicates the company’s product is releasing toxic by-products. The company suppressed that report. A later report commissioned by the ‘company shows there is no problem with the fertilizer. = Should the company’s chief executive officer reveal the content of the unfavor- Able report in discussions with Jones County representatives? Discuss. EX 1-3 Business entity concept Rocky Mountain Sports sells hunting and fishing equipment and provides guided hunt- Jing and fishing tips. Rocky Mountain Sports is owned and operated by Mike Weber, a ‘wellknown sports enthusiast and hunter. Mike's wife, Susan, owns and operates Madison. Boutique, a women’s clothing store. Mike and Susan have established a trust fund 10 finance their children's college education, The trust fund is maintained by National Bank in the name of the children, Kerri and Kyle 4. For each of the follawing transactions, identify which of the entities listed should record the transaction in its records A Rocky Mountain Spon 5 Natnal Bank Test Fund ™ Madison Boutique x None ofthe above001.3 ¥ Starbucks, 081.3 1 2.600000 081.3,4 1b. $530,000 Chapter Introduction to Accounting and Business 33, 1,Susin authorized the trust fund to purchase mutual fund shares, 2.Susan purchased two dozen spring dresses from a Chicago designer for a special spring sale 3.Mike paid a breeder's fee for an English springer spaniel to be used as a hunting ‘guide dog. 4.Susan deposited a $3,000 personal check in the trust fund at National Bank. 5. Mike paid a local doctor for his annual physical, which was required by the work ‘men's compensation insurance policy carried by Rocky Mountain Sports. 6.Mike received a cash advance from customers for a guided hunting trip. 7.Susan paid her dues to the YWCA. S.Susan donated several dresses from inventory for a local charity auction for the ‘benefit of a women's abuse shelter 9.Mike paid for dinner and a movie to celebrate their fifteenth wedding anniversary. 10.nfike paid for an advertisement in a hunters’ magazine, b, What is a business transaction? X14 Accounting equation ‘The total assets and total labil shown below. ities of Peat’s Coffee &'Tea Inc. and Starbucks Corporation are Peat Cotlee Te in milons)_ Starbuck nmi issets 3176 $5577 abies 3 2531 Determine the owners’ equity of each company. EX 1-5 Accounting equation “The total assets and total Habiltes of Dollar Tres nc. and Target Corporation are shown below. Dollar Teen ilions) Target Corporation milion) Iesets $2036 $44,106: abies 783 30394 Determine the owners’ equity of each company. EX 1-6 Accounting equation Determine the missing amount for each of the following: ‘Acts = Unbiltes + Owners 2 = $1800 + $450,000, b $2750 = x)= + 50000 © 615000 = 190000 + x 1-7 Accounting equation ‘Todd Olson is the owner and operator of Alpha, a motivational consulting business. At the end of its accounting period, December 31, 2011, Alpha has assets of $800,000 and liabilities of $350,000, Using the accounting equation and considering each case indepen- dently, determine the following amounts: 2. Todd Olson, capital, as of December 31, 2011 . Todd Olson, capital, as of December 31, 2012, assuming that assets increased by $150,000 and liabilities increased by $70,000 during 2012. Todd Olson, capital, as of December 31, 2012, assuming that assets decreased by $860,000 and liabilities increased by $20,000 during 2012. 4. Todd Olson, capital, as of December 31, 2012, assuming that assets increased by $100,000 and liabilities decreased by $40,000 during 2012. ‘©, Net income (or net loss) during 2012, assuming that as of December 31, 2012, assets were $975,000, liabilities were $400,000, and there were no additional in- vestments or withdrawals34 Chapter ons.2 ons one ¥.3.(1) increase $250,000, oni. Introduction to Accounting and Business EX1-8 Asset, liability, owner's equity items Indicate whether each of the following is identified with (1) an asset, @2) a liability, oF G) owner's equity a. cash wages expense accounts payable fees eamed supplies land EX 1-9 Effect of transactions on accounting equation Describe how the following business transactions affect the three elements of the ac- counting equation, a. Invested cash in business. . Purchased supplies For cash 6 Purchased supplies on account 4. Received cash for services performed. €. Paid for utilities used in the business. {1-10 Effect of transactions on accounting equation 4. A vacant lot acquired for $100,000 is sold for $350,000 ia cash. What is the effect of the sale on the total amount ofthe seller's (assets, (2) abilities, and G) owner's equity? Assume thatthe seller owes $75,000 on a loan for the land. After receiving the $350,000 cash in (a), the seller pays the $75,000 owed. What is the effect of the payment on. the total amount ofthe seller's (1) assets, (2) liabilities, and (3) owner's equity? Is it true that a transaction always affects at least gwo elements (Assets, Liabilities, oF Owner's Equity) of the accounting equation? Explain, C1-11 Effect of transactions on owner's equity Indicate whether each ofthe following types of transactions wi equity or (b) decrease owner's equity: 1, owner's investments shes (a) increase owner's 2, revenues 3. expenses 4. owner's withdrawals EX1-12 Transactions ‘The following selected transactions were completed by Speedy Delivery Service during. October: 1 Received cash from owner as additional investment, $30,000. 2.Purchased supplies for cash, $1,500. 3.Paid rent for October, $4,000, 4.Paid advertising expense, $2,500. 5. Received cash for providing delivery services, $18,750. 6. Billed customers for delivery services on account, $41,500. 7. Paid creditors on account, $6,000, ‘8. Received cash from customers on account, $26,200. {9.Determined that the cost of supplies on hand was $250; therefore, $1,250 of supplies had been used during the month, 10,Paid cash to owner for personal use, $2,000.oa. 4.813.200 ons oan. ¥ Leo: Net income, $60,000, Chapter 1 Intoduetion to Accounting and Business 35, Indicate the effect of each transaction on the accounting equation by listing the mun bers identifying the transactions, (1) through (10), in a column, and insesting at the right of each number the appropriate leter from the following list a. Increase in an asset, decrease in another asset. Increase in an asset, inerease in a liaill Decrease in an asset, decrease in a ability. is b, & Increase in an asset, inerease in owner's equity, 4 Decrease in an asset, decrease in owner's equity. EK 1-13. Nature of transactions Jeremy Zabel operates his own catering service. Summary financial data for February are Each inerease and decrease in owner's equity, except transaction (5), affects net income. Assets = Lsbames + ‘owners Equity cats + supptes + Land ‘Syabie «”*“Eaptal"—el Broun + Eomed Expenses ol 25000 200075000 1200090000 1. 429}000 25000 2 “20000 429000 2-400 14000 “ 1000 1000 5 - 200 2000 & - 790 7000 2 00 35000 6000 El 8, Describe exch transaction. What is the amount of net decrease in cash during the month? . What is the amount of net increase in owner's equity during the month? dd, What is the amount of the act income for the month? 6. How much of the net income for the month was retained in the business? EX 1-14 Netincome and owner's withdrawals ‘The income statement of a proprietorship for the month of December indicates a net income of $120,000. During the same period, the owner withdrew $130,000 in cash from the business for personal use Would ie be correct to say that the business incurred a. net foss of $10,000 dur ing the month? Discuss, EX 1-15 Net income and owner's equity for four businesses Four different proprietorships, Aries, Gemini, Leo, and Pisces, show the same balance sheet data at the beginning and end of a year. These data, exclusive of the amount of owner's equity, are summarized as follows: Beginning ftheyear —— S40q000 $100.00 Endofthe yar 730.000 300,000 On the basis of the above data and the following additional information for the year, determine the net income (or los) of each company for the year. (int: Fest determine the amount of increase or decrease in owner's equity during the year) Aries: The owner had made no additional investments in the business and had made no withdrawals from the business, Gemini The owner had made no additional investments in the business but had with: drawn $40,000. Leo: The owner had made an additional investment of $90,000 but had made no ‘withdrawals, Pisces: The owner had made an addtional investment of $90,000 and had withdrawn $40,000.36 Chapter Introduction Accounting and Business oni.s EX 1-16 Balance sheet items From the following list of selected items taken from the records of Hoosier Appliance Service as of a specific date, identify those that would appear on the balance sheet 1. Accounts Receivable 6.Supplies 2.cash 7. Supplies Expense 3.Fees Famed, 8.Uilities Expense 4.land 9. Wages Expense 5.Patsy Adkins, Capital 10. Wages Payable ons. (1-17 Income statement items Fased on the data presented in Exercise 1-16, identify those items that would appear on the income statement EX1-18 Statement of owner's equity \v Penny Beall capita, Financial information related to Lost Trail Company, a proprietorship, for the month ended Sune 30, 2012:5482,000 June 30, 2012, is as follows 5 Netincome for une 5125000 Penny Beallswithcrawals during June 18,000 Panay Beallscapial June 1,2012 375,000 a. Prepare a statement of owner's equity for the month ended June 30, 2012. . Why is the statement of owner's equity prepared before the June 30, 2012, balance sheet ons EX1-19 Income statement Net income: Universal Services was organized on October 1, 2012. A summary of the revenue and $448,000 expense transactions for October follows: Foes eamed ‘00000 Wages expense "2rog00 Rentexpense 0000 Supples expense ‘9000 Miscellaneous expense 12000 Prepare an income statement for the month ended October 31 ons.s EX 1-20 Missing amounts from balance sheet and income statement data 1 (2) $45,000 ‘One item is omitted in each of the following summaries of balance sheet and income statement data for the following four different proprietorships: Aquarius —_Uibea Scorpio Taurus Beginning of the yer Assets $300}000 $s0nG00 $100,000 @ Usbities 120000 260000 76000 $120000 End ofthe year ‘Assets 420920 7o0G00 90000 248,000 Usbities vie000 220000 89.000 136000 During the year ‘Aitionalinvestrentin the business (#10000 roc 40,000, Withdrawals from the business 25000 32000 (@ 0000 Revenue 199000 tb} 115000112000, Expenses 80000 128000 122500 128,000 Determine the missing amounts, identifying them by letter. (int: First determine the amount of inerease or decrease in owner's equity during the year.)ons. 7b. $40,000 B: Chapter Introduction to Accounting and Business 37 EX 1-21 Balance sheets, net income Financial information related to the proprietorship of Lady Interiors for July and August 2012 is as follows aly 33,2012 12 Recounis payable 90,000, Accounts reenable 200000 Garth Jacobs, capital ? 2 Goan 20000 95.000 supies 20000 15,00 4, Prepare balance sheets for Lady Interiors as of July 31 and August 31, 2012. \. Determine the amount of net income for August, assuming that the owner made no additional investments or withdrawals during the month. Determine the amount of net income for August, assuming that the owner made no additional investments but withdrew $35,000 during the month, EX 1-22 Financial statements Each of the following items is shown in the financial statements of Ecxonobil Corporation. 1. Accounts payable 9. Marketable securities 2.Cash equivalents 410.Notes and loans payable 3.Crude oil inventory ALNotes receivable 4. Equipment 12.Operating expenses 5. Exploration expenses 13.Prepaid taxes 6.Income taxes payable 14.sales Tlnvestments 15.Selling expenses 8.Longterm debt 4. Identify the financial statement (balance sheet or income statement) in which each item would appear, . Can an item appear on more than one financial statement? Is the accounting equation relevant for ExxonMobil Corporation? 1-23. Statement of cash flows Indicate whether each of the following activites would be reported on the statement of ash flows as (a) an operating activity, () an investing aetvity, oF (©) financlag activity 1. Cash received from fees eamed, 2. Cash paid for expenses. 3. Cash paid for land. 4. Cash received as an additional investment by owner EX 1-24 Statement of cash flows A summary of cash flows for Absolute Consulting Group for the year ended July 31, 2012, is shown below. Cashel Cash received from customers 3187.500 Cosh received from adeitona investment of owner 40000 ash payments: ‘Cash pad for operating expenses 127350 Cash pad for land ‘900 Cash pad to one for personal use ‘5000 “The cash balance as of August 1, 2011, was $27,100 Prepare a statement of cash flows for Absolute Consulting Group for the year ended July 31, 2012.38 Chapter ons.s ¥ Comect amount ‘ftotal asset ie $88,200. Introduction to Accounting and Business 1-25 Financial statements Empire Realty, organized May 1, 2012, is owned and operated by Bertram Mitchell. How ‘many errors can you find in the following statements for Empire Realty, prepared after its first month of operations? Sales commissions 5033550 Expenses: ‘Office salaries expense. Rent expense Automobile expence Miscellaneous expense. Supplies expense. Total expenses 211500 Net income Bertram Mitchell Statement of Owners Equity May 31,2071 Bertram Mitchel capital May 1, 2012. Less withdrawals during May. Aitional investment during May. Sa9050 Net income for May 57.050 Bertram Mitchel capita May 31,2012 Tit6.100 Balance shat Forthe Month Ended May 31,2012 eset abies Cath csssestense + $14,850 Accounts ecevable...... $ 64350 ‘Accounts payable 17100 Supplies 000 ‘Owner's Equity Bertram Michel capital 116,100 Total assets $2950 Total labllties and ovners equity. 31a9.450 EX 1-26 Ratio of liabilities to stockholders’ equity ‘The Home Depot, nc, Is the world's largest home improvement retailer and one of the largest retailers in the United States hased on net sales volume. The Home Depot oper- ates over 2,000 Home Depot® stores that sell a wide assortment of building materials and hhome improvement and lawn and garden products “The Home Depot reported the following balance sheet data (in millions): Feb. 1,2009_Feb.3,2008, Talaeete Sieh 844324 Total stockholder equty anna 4. Determine the total abilities as of February 1, 2009, and February 3, 2008. Db, Determine the ratio of liabilities to stockholders’ equity for 2009 and 2008. Round 10 ‘wo decimal places c. What conclusions regarding the margin of protection to the creditors can you draw from (6)? EX 1-27 Ratio of liabilities to stockholders’ equity ‘one's, a major competitor of the Home Depot in the home improvement business, oper- ates over 1,600 stores, For the years ending January 30, 2009, and February 1, 2008, Lowe's reported the following balance sheet data (in millions):chapter Intoduction to Accounting and Business 39) Jan. 30,2009 Feb 1,2008 Tok asste sszees $30,869 | Total abies wae azn Determine the total stockholders’ equity as of January 30, 2009, and February 1, 2008. b. Determine the ratio of liabilities to stockholders’ equity for 2009 and 2008. Round to ‘wo decimal places. What conclusions regarding the margin of protection t0 the creditors can you draw from (by? 4. Using the balance sheet data for The Home Depot in Exercise 1-26, how does the ratio OF labilties to stockholders’ equity of Lowe's compare to that of The Home Depot? Packet oa. PR1-1A Transactions ¥ Cash bal atend of On September 1 of the current year, Maria Edsall established a business to manage rental September: $37,700 property. She completed the following transactions during September: ‘Opened a business bank account with a deposit of $0,000 from personal funds. 1. Purchased supplies (pens, file folders, and copy paper) on account, $2,200, Received cash from fees earned for managing rental property, $6,000. Paid rent on office and equipment for the month, $2,700. Paid creditors on account, $1,000. Billed customers for fees earned for managing rental property, $5,000. Paid automobile expenses (including rental charges) for month, $600, and miscella- cous expenses, $300, hh, Paid office salaries, $1,900 Determined that the cost of supplies on hand was $1,300; therefore, the cost of sup- plies used was $900. |. Withdrew cash for personal use, $1,800, Instructions 1, Indicate the effect of each transaction and the balances after exch transaction, using the following tabular headings: mrepeee Assets Usbaes + wnersEguty ecouns ‘ecourts —NafaEol|MaeEdbal, Fees Rent SaanesSupples Auto Mi. Payable + Captal — Drawing + Eamned - Expense ~ Gipense - pense ~ Spense - Spense 2. qm Briefly explain why the owner's investment and revenues increased owner's ‘equity, while withdrawals and expenses decreased owner's equity. 3. Determine the net income for September. 4, How much did September's transactions increase or decrease Maria Bdsall’s capital? on. PR1-2A Financial statements W1.Netincome: Following are the amounts of the assets and liabilities of New World Travel Agency at $40,000 December 31, 2012, the end of the current year, and its revenue and expenses for the year. The capital of Kris Taber, owner, was $120,000 on January 1, 2012, the beginning Of the current year. During the current year, Kris withdrew $10,000. Aecounts payable $ 25000 Rentexpense 545.000 Aecounts receivable 60000 Seppe 5000 coh riac00 ——Suppllesexperse 3000 Fees eamed 200000 Utiteserpense 18600 Miscelancousexpense «4000 Wagasexpense 90.000, Instructions 1. Prepare an income statement for the current year ended December 31, 2012. 2. Prepare a statement of owner's equity forthe current year ended December 31, 2012. (Cominued)40 Chapter ons V1. Net income: $26,400 Introduction to Accounting and Business 3. Prepare a bakance sheet as of December 31, 2012, 4. What item appeats on both the statement of owner's equity and the balance sheet? PRI-3A Financial statements Heidi Fritz established Freedom Financial Services on March 1, 2012, Freedom Financial Services offers financial planning advice to its cients. The effect of each transaction and. the balances after each transaction for March are shown below. Assets = abies + Owner sEauty eat Hei recoynes its, Fens, foes Sats Rent Ato —Supples Mico cash + MeBible-+Sipptes= Haake’ + capil Drawing + Eomed — Spence ~ Erpense~ Bipene ~ Beene ~ Expense +4500 45000 5 510 16540 sat “5006 30 640000 <_-1800 a) fal 45200 Ce) a seso00 seers 24000 tat T2720 wa Ow ‘4000 © 22500 22500 Bat 104700 3S BRD cod “2500 © -t7100 3600 sat 87600 sao Sw ‘400 B00 600 a ~aaco0 +809 at "39600 Cr) wamee enn | “aas0G | “35 3% h 4500 asta eat “a rd a ee Cr) i #3450 434500 sa "350014500 30a aH A5 0 ias00 “aap00 | R500 “asad © asad “300 5 15000 15000 at 2ac00 34500 Zou © “aa “aSpo0 15000 © aso ago “soe am smo “3m 081.4,5 ¥ 2.Netincome: $12,150 Instructions 1. Prepare an income statement for the month ended March 31, 2012. 2. Prepare a statement of owner's equity for the month ended March 31, 2012. 3. Prepare a balance sheet as of March 31, 2012. 4. (Optional). Prepare a statement of cash flows for the month ending March 31, 2012 PRI-4A Transactions financial statements ‘On January 1, 2012, Carlton Myers established Vista Realty. Carton completed the fol. lowing transactions during the month of January: 4, Opened a business bank account with a deposit of $25,000 from personal funds. ', Purchased supplies (pens, file folders, paper, ete.) on account, $2,500. Paid creditor on account, $1,600. 4. Eamed sales commissions, receiving cash, $25,500. €. Paid rent on office and equipment for the month, $5,000. {. Withdrew cash for personal use, $8,000. { Pald automobile expenses (including rental charge) for month, $2,500, and miscel- Janeous expenses, $1,200, 1 Paid office salaries, $3,000. Determined that the cost of supplies on hand was $850; therefore, the cost of supplies used was $1,650. Instructions 1. Indicate the effect of each transaction and the balances after each transaction, using the following tabular headings:Analyzing Transactions Apple, Inc.™ E.Pe hae ‘After studying his chapter, youshould be abl to: Describe the characters ofan account and cart of accounts. Using Accouns to Record Transactions Describe and iusvatejounalzing transactions sing the double-enty accounting system Double-crry Rezunting System alance Sheet Accounts Income Statement Recounts ‘GnmerWithsral Normal alances Journaling Deserbe and ilustrat the ounaliing and posting of transactions a Prepare on unscjuste tal balance and expsin how itcanbe used to Br discoverers ors Not Afectng te a Balance Describe and ilustratethe us of hozontalanahyss in evaluating» ‘companys performance ia fnaneal andion Fanci Ana}yss and interpretation Herzonal Anse wal Deethe Using Accounts to Record Transactions cfancount and ar ot accounts. In Chapter 1, the November transactions for NetSolutions were recorded using the accounting equation format shown in Exhibit 1, However, this format is not efficient for practical for companies that have to record thousands or millions of transac- tions daily. As a result, accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account. To illustrate, the Cash column of Exhibit 1 records the increases and decreases in ‘ash, Likewise, the other columns in Exhibit 1 record the increases and decreases in the other accounting equation elements. Each of these columns ean be organized, into a separate account ‘An account, in its simplest form, has three part 1. Atte, which isthe name of the accounting equation element recorded in the 2. A space for recording increases in the amount of the element 3. A space for recording decreases in the amount of the element count ‘The account form presented below is called a T account because it resembles the letter . The left side of the account is called the debit side, and the right side is called the credit side." re Leftside | Figheside ‘eb ‘adeCChapter2 Analyzing Transactions 53 EXH. ‘NetSolutions | Assets = Liabilities + ‘owner's Equity ‘Accounts Chis Cask Chis Chr, Fes Wages Rent Supplies Utes Mis Gosh + Supp. + Land = Payable + Capital — Drawing + Exned = Emp. — Exp Op Bp ~ Ep 25000 +5000 * eam no Som m0 088 F saa iaia tu jm “iso Tos Bi pees a0 osm Tam we aw 7500 er ns om otis Tae moe aw 700s on os so ee ne) a) ae * 0 a moe 7 3 wm OE 20 a am sj Em im im em mw OH ‘he amouits shown inthe Cash colin of Exhibit 1 woul! be seconded in a aioe eulene Mote ard on teenie ctan P Sauce at sano | @ a9 000 fa ent cee | 7500 | () so | crt — Seat 6 980 peor pecoune oy goo | secu tance “5 Dance facut Recording transactions in accounts must follow certain rules. For example, i creases in assets are recorded on the debit (left side) of an accoulit LIRA, (e119 °° ‘creases in assets are recorded on the credit (right side) of an account. The excess of the debits of an asset account over its credits is the balance of the account, To illustrate, the receipt (increase in Cash) of $25,000 in transaction (a) is entered fon the debit (lef) side of the cash account shown above. The letter or date of the transaction is also entered into the account. This is done so if any questions later arise related to the entry, the entry can be traced back to the underlying transaction data. In contrast, the payment (decrease in Cash) of $20,000 to purchase land in transaction (b) is entered on the credit (righ side of the account. ‘The balance of the cash account of $5,900 is the excess of the debits over the credits as shown below. eb ($25:000 + $7500) 332,500 ‘Less rei ($20,000 + $3650 $950 + $2,000, Balance of Cash ae of November 30, 2011 ‘The balance of the cash account is inserted in the account, in the Debit column. In this way, the balance is identified as a debit balance.” This balance represents NetSolutions’ cash on hand as of November 30, 2011. This balance of $5,900 is reported on the November 30, 2011, balance sheet for NetSolutions as shown in Exhibit 6 of Chapter 1. 2Ttottotte dt adc column be hownsapetyInanacaut When ons fae amous hele ‘deed nsome wy 0 tthe oe et isan or eres ert en anes oe ace54 Cchapter2 Analyzing Transactions Inan actual accounting system, a more formal account form replaces the T account. Later in this chapter, a four-column account is illustrated. The T account, however, is a simple way to illustrate the effects of transactions on accounts and financial state ments. For this reason, T accounts are often used in business to explain transactions. Each of the columns in Exhibit 1 can be converted into an account form in a similar manner as was done for the Cash column of Exhibit 1. However, as mentioned earlier, recording increases and decreases in accounts must follow certain rules. These rules are discussed afier the chart of accounts is described, Chart of Accounts A group of accounts for a business entity is called a ledger. A list of the accounts in the ledger is called a chart of accounts. The accounts afe normally listed in the order in which they appear in the financial statements, The balance sheet accounts are listed first, in the order of assets, liabilities, and owner's equity. The income state- ‘ment accounts are then listed in the order of revenues and expenses. Assets are resources owned by the business entity. These resources can be physical items, such as cash and supplies, or intangibles that have value. Examples of intangible assets include patent rights, copyrights, and trademarks. Assets also include accounts receivable, prepaid expenses (Such as insurance), buildings, equipment, and land. Liabilities are debts owed to outsiders (creditors) Liabilities are often identified on the balance sheet by tiles that include payable. Examples of liabilities include accounts payable, notes payable, and wages payable, Cash received before services are delivered creates liability to perform the services. These future service commitments are called ‘unearned revenues. Examples of uncarned revenues include magazine subscriptions received by a publisher and tuition received at the beginning of a term by a college. ‘Owner's equity is the owner's right fo the assets of the business afterall Tabi ties have been paid, For a proprietorship, the owner's equity is represented by the balance of the owner's eapital account. A drawing account represents the amount of withdrawals made by the owner. Revenues are increases in owner's equity as a result of selling services or products {0 customers, Examples of revenues include fees earned, fares earned, commissions revenue, and rent revenue. NATO 6) ‘THE HIJACKING RECEIVABLE ‘company's chart of accounts should reflect the basic na- ‘ure of is operations. Occasionally, however, transactions take place that give rise to unusual accounts, Thefllowing Isa stoy of one such account Before strict aiport security was implemented across ‘the United States, several aicines experienced jacking incidents. One such incident occurred when a Sout ein Always DC-9 en route from Memphis to Miami was hhjacked during a stopover in Birmingham, Alabama. The ‘three hijackers boarded the plane in Birmingham armed, ‘with handguns and hand grenades. At gunpoint, the hi- jackerstook he plane the planes crew, and the passengers ‘oni American cites, Toronto, and eventually to Havana, cuba. ‘During the lang fight, the hijackers demanded a ran- som of $10 milion. Southern Airways, however, was only ble to come up with $2 millon. Eventually, the plot aed ‘the hijackers into setting forthe $2 millon when the plane landed in Chattanooga for refusing, Upon landing in Havana, the Cuban authortes a rested the hackers and, after a bref delay, set the plane, ‘passengers, and crew back to the United States, The hijack 15 and $2 millon stayed in Cuba How did Souther Airways account fo and repor the Injacking payment in ks subsequent financial statements? ‘As you might have analyzed, the inital entry credited Cash {or 52 millon. The debt was to an account entitled "jack- Jing Payment” This account was reported as a type of r= ‘elvable under “other assets” on Souther’ balance sheet. The company maintained that i would be able to collet the cash from the Cuban government and that, therefore, _2recevable existed Infact, Southern Always was repld $2 milion by the Cuban government, which was, a that me, attempting to Improve relations with the United States.Chapter? Analyzing Transactions 55 Expenses result from using up assets or consuming services in the process of generating revenues. Examples of expenses include wages expense, rent expense, utilities expense, supplies expense, and miscellancous expense. ‘A chart of accounts should mect the needs of a company’s managers and other users of its financial statements. The accounts within the chart of accounts are num hhered for use as references. A numbering system is normally used, so that new ac- counts can be added without affecting other account numbers. Exhibit 2is NetSolutions’ chart of accounts that is used in this chapter. Additional accounts will be introduced in later chapters. In Exhibit 2, each account number has two digits. The first digit indicates the major account group of the ledger in which "> Gnbl’sacount the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, {gps sete ‘owner's equity; 4, revenue; and 5, expenses. The second digit indicates the location pagiimanyatferent Of the account within its group. pertlon d egln, aanc Shoat cots Income Staten Accounts — 1. Assets, 4 Revenue eee 1 Gh “41 Fees Eamed NetSolations 12 Accounts Recehable 5: Expenses 14 Supaes 51 Voges pense 15 Presid imrance 52 Rentfspeme 1 land 54 Uilies Expense 1 Ofcs Eqdpment 55. Supper Expenee 2. Unbiies 58. Micalinecus Expense 21 Acouns Payoble 2 Uncamed tent, 2. Owners Equity 3 chet cpt 22 Cvs Chak, Orawing Each of the columns in Exhibit 1 has been assigned an account number in the chart of accounts shown in Exhibit 2. tn addition, Accounts Receivable, Prepaid Insurance, Office Equipment, and Uneamed Rent have been added. These accounts will be used in recording NetSolutions’ December transactions Double-Entry Accounting System = Desert ad Ie tara Al businesses use what is called the double-entry accounting system, This system unateng vansctons is based on the accounting equation and requires: act ele 1. Every busines transaction to be recorded in at last two accounts 2. The total debits recorded for each transaction to be equal to the total credits recorded. ‘The double-entry accounting system also has specific rules of debit and credit for recording transactions in the accounts. Balance Sheet Accounts ‘The debit and credit rules for balance sheet accounts are as follows: Balance Sheet Accounts ‘ASSETS ‘UaBiLiES ‘OwneR’s EQUITY Asset Accounts = _LiabilityAccounts__+ Owner's Equity Accounts Debit for Creditfor Debit for reditfor Debit for Credit for Increases (2) | decreases(-) decreases) | increases(+) decreases(-) | Increases (4)56 Chapter? An State for each account 1. Amber Saunders, 2. Accounts Payable 3 Gash 3. Debit and credit Example Exercise 2-1 rei entries Also, indicate its normal balance. Gene alyzing eansactions Income Statement Accounts. ‘The debit and credit rules for income statement accounts are based on their relation- ship with owner's equity. As shown on page 55, owner's equity accounts are increased by credits, Since revenues increase owner's equity, revenue accounts are increased by credits and decreased by debits, Since owner's equity accounts are decreased by debits, expense accounts are increased by debits and decreased by credits, Thus, the rules of debit and credit for revenue and expense accounts are as follows: Income Statement Recounts Revenue Accounts Expense Accounts Debit for Credit for Debit for Credit for ecreases(-) | increases (+) Inereases (+) | decreases(-) Owner Withdrawals ‘The debit and credit rules for recordingvowmen withdmwals are based on the effect of owner withdrawals on owner's equity. Since owner's withdrawals decrease owner's ‘equity, the owner's drawing account is increased by debits. Likewise, the owner's drawing account is decreased by credits. Thus, the rules of debit and credit for the owner's drawing account are as follows: Drawing Account Debit for Greditfor increases(+) | decreases\-) Normal Balances ‘The sum of the increases in an account is usually equal to oF greater than the sum of the decreases in the account. Thus, the normal balance of an account is cither debit or eredit depending on whether increases in the account are recorded as debits ff credits, For example, since asset accounts are increased with debits, asset accounts, normally have debit balances, Likewise, lability accounts normally have credit halances, ‘The rules of debit and credit and the normal balances of the various types of accounts are summarized in Exhibit 3. Debits and credits are sometimes abbreviated as De. for debit and Cr. for credit, ‘When an account normally having a debit balance has a credit balance, or vice versa, an error may have occurred or an unusual situation may exist. For example, a credit balance in the office equipment account could result only from an error. This it whether its ikely to have (a) debit entries only, (b) ret entres only, or () both debit and Drawing 4. Fees Eamed 5. Supplies 6. Usities Expense 1. Debit entries only; normal debit balance 4 Credit entries only; normal credit balance 2. Debit and credit entries; normal credit balance '5. Debit and crit entries; normal debit balance nies; normal debit balance 6. Debit entries ony; normal debit balance «Practice Exercises PE 2-1A, PE 2-1BCChapter2 Analyzing Transactions 57 }T 3 Rules of Debit and Credit, Normal Balances of Accounts ABILITIES + OWNERS EQUITY eee Liability Accounts Owner’ Capital Account Cedifor Debit for Debi or decreases) _deceases(-) lecrestes-) 1 ~ Owner's Drawing ee Income Statement Accounts cartel “Revenue Accounts ecresses(-]__—_ Debtor decrease), — Expense Recounts dior decreases) “The se of th account for recodig increas aed the normal balances showin green, Netincomec net ioe is because a business cannot have more decreases than increases of office equipment. On the other hand, a debit balance in an accounts payable account could result from aan overpayment. Journalizing Using the rules of debit and credit, transactions are initially entered in a record called a journal. In this way, the journal serves as a record of when transactions occurred ‘and were recorded, To illustrate, the November transactions of NetSolutions from Chapter 1 are used. "Nov. 1 Chris Clark deposited $25,000 in a bank account in the name of NetSolutions, ‘Transaction A ‘This transaction increases an asset account and increases an owner's equity account. It is recorded in the journal as an increase (debit) to Cash and an Aaalysis inerease (credit) to Chris Clark, Capital a) Journal Entry hs Clark, Capital Sarat step Ascate Lsbities58 Chapter2._ Analyzing Transactions «& [journal canbe thought ‘of asbeng sia to Snindvials day of Sigcicant day o-y te ‘The transaction is recorded in the journal using the following steps: Step 1 Step 2 Step 3. Step 4. Step 5. ‘The date of the transaction is entered in the Date column, ‘The title of the account to be debited is recorded at the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column, ‘The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column. ‘A brief description may be entered below the credited account. ‘The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded. This column is used later in this chapter when the journal entry amounts are transferred to the accounts in the ledger. ‘The process of recording a transaction in the journal is called journalizing. The ‘entry i in the journal is called a journal entry. ‘The following is a useful method for analyzing and journalizing transactions: 1. Carefully read the description of the tansaction to determine whether an asset, a liability, an owner's equity, a revenue, an expense, or a drawing account is affected 2. For 3. Det each account affected by the transaction, determine whether the account inereases ‘decreases. ermine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit shown in Exhibit 3. 4, Record the transaction using a journal entry ‘The fol lowing table summarizes terminology that is often used in describing a trans- action along with the related accounts that would be debited and credited, Journal Entry Account Common transaction terminology Debit Credit Recelved cash for services provided Cash Fees med Services provided on account Accounts Receiveble Fees Eaned Received cash on acount Cosh Accounts Receivable Purchased on account Asset Account Accounts Payable Paid on account Aecounts Payable ash id eash Asset or Sxpense Account Cash ‘Owner investments Cash and/or other assets (Owner's Name), Capital ‘Owner withdrawals (Owners Name), Drawing Cash ‘The remaining transactions of NetSolutions for November are analyzed and jour nalized next. ‘Transaction B Analysis Journal Entry Nou 5 ‘NetSolutions paid $20,000 for the purchase of land as a future building sie ‘This transaction increases one asset account and decreases another. Its recorded in the journal as a $20,000 increase (debit) to Land and 2 $20,000 decrease (credit) to Cash, Now. |5| tana 20000 ‘cash 20900 Purchased and for bulding st. eset Usb . ‘Owners Equity(chapter? AnalyzingTransactions 59 Ta gr —— Sar ara PEROT cna ——— ws eS == = see a It is recorded in the journal as a $7,500 increase (debit) to Cash and a $7,500 Analysis naa ane = arse ox Pa a Nov. 30 NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. ‘This transaction increases various expense accounts and decreases an asset (Cash) account. You should note that regardless of the number of accounts, the ‘sum of the debits is always equal to the sum of the credits in a journal entry. tis recorded in the journal with increases (debits) to the expense accounts (Wages Expense, $2,125; Rent Expense, $800; Utilities Expense, $450; and Miscellaneous Expense, $275) and a decrease (credit) to Cash, $3,650. Now. 30, Wages Expense 22s Rent Expense ‘00 Utes Expense 430 Miscellaneous Expense as Cash 3550 Pai expenses. is - abies + Owners Equity (Expense) ‘Transaction E Analysis Accounting Equation Texpact60 Chapter 2_ Analyzing Transactions ‘Transaction F Analysis Journal Entry Accounting. Equation Impact ‘Nov, 30 NetSolutions paid creditors on account, $950. ‘This transaction decreases a liability account and decreases an asset account, It is recorded in the journal as a $950 decrease (debit) to Accounts Payable and 4 $950 decrease (credit) to Cash. Now. |30) Accounts Payable 350 cash 950 Paid creditors on account Usbiies + nner Equity ‘Transaction G ‘Nov. 30. Chris Clark determined that the cost of supplies on band at November 30 was $550. "NetSolutions purchased $1,350 of supplies on November 10, Thus, $800 ($1,350 — $550) of supplies must have been used during November. This tansaction is Analysis recorded in the journal as an $800 increase (debit) to Supplies Expense and an io ee Ca oases eo ea - aes — neers “Some Fr = nn ee SS eS TT sume Se a ee eo ee Journal Entry decrease (credit) to Cash. Post. ate Description fet | Debit | creat Now. [30] Chris atk, Drawing 2.000 ash 2000 ‘Cri lark withdrew cash for personal = Assets - Lsbitios + Owners Equity (rowing) Integrity, Objectivity, and Ethics in Business \WILL JOURNALIZING PREVENT FRAUD? ‘while journalizng transactions reduces the possibilty of system by creating fctious supplies to whom checks are {ravd, it by no means eliminate it. For example, embezzle- issued. ‘ment can be hidden within the double-entry bookkeepingAnalyzing Transactions Apple, Inc.™Pe es od Aer studyng th chapas yuo abet = Shh exp ad rats ouralaing tanacion sing he dbl ety counting sam. tien secoring Stem ss Seen te en oem Pop nn ban nein ow tambo ror Nat acing te ral Snce Finonl nasianainepretts Herzl als wn oe Using Accounts to Record Transactions ciamscoutards tn Chapter 1, the November transactions for NetSoluions were recorded Using the accounting equation format shown in Exhibit 1. However, this format is not efficient fr practical for companies that have to record thousands oF aulions of wansac ons daily. As result, accounting systems are designed to show the increases and creases in each accounting equation element 2s 2 separate record. This record is jed an account. ‘To illsrate, the Cash column of Exhibit 1 records the increases and decreases in cash, Likewise, the other columns in Exhibit 1 record the increases and decreases in the other accounting equation elements. Each of these columns can be organized into a separate account ‘Ae account, ia its simplest form, has three pasts. 1. Aide, which i the name ofthe accounting equation element recorded inthe account 2. A-space for eeconding increases inthe amount of the element. 5. A space for recording decreases inthe amount of the element. ‘he account form presented below is called a T account because it resembles the letter T. The left side ofthe account is called the debit side, and the right side is called the credit side, Title ‘ete | ighesge cee ‘ondeChapter 2 AnalyzingTransactions 53 EXHIBIT 1 NetSolutions November Transactions Assets Liabilities + Owner's Equity ‘Accounts Chis, Chis Crk Fees Wages Rent Supples Ules Mis Gah + Supp. + Land = Payable + Gil - Caving + med Bp - Sp - Bp - Be - Be 125000 25000 ‘6 -2ns00 29000 bat 2000 75.000 © 1380 tal mone 1350 25000, 3 27300 bat yao 138095000 7500 © 2105-800 150-25 bal mance | 13035000 7500-2125 “300 075 « 0 al mone =~ 40035000 750 “233 “500 a0 os ° 200 Bal zone = 40035000, 750 "2135 oo “ooo “50 “ars b 2.000 al mance = mo) 50) pom sm ais meme) a ‘The amounts shown in the Cash column of Exhibit 1 would be recorded in a ceash account as follows: @ 25,000 pet | 7,500 Side of Aecount o 20000 ‘@ 3.650 | Credit © 950 | Side of 2000 | Account Balance Balance of account Recording transactions in accounts must follow certain rules. For example, in- creases in assets are recorded on the debit (eft side) of an accu? Hkewise, d&0-1159° ‘creases in assets are recorded on the credit (right side) of an account. The excess of the debits of an asset account over its credits is the balance of the account. ‘To illustrate, the receipt (increase in Cash) of $25,000 in transaction (a) is entered fon the debit (lef) side of the cash account shown above. The letter or date of the transaction is also entered into the account. This is done so if any questions later arise related to the entry, the entry can be traced back to the underlying transaction, data. In contrast, the payment (decrease in Cash) of $20,000 to purchase land in transaction (b) is entered on the credit (right) side of the account. ‘The balance of the cash account of $5,900 is the excess of the debits over the credits as shown below. Debits (525,000 + $7,500) 532500 Less reds $20,000 + $3,550 5950+ $2000) a 26.600 Balance ofCash as of November 30,2011 g ‘The balance of the cash account is inserted in the acount, in the Debit column. In this way, the balance is identified as a debit balance? This balance represents, \NetSolutions’ cash on hand as of November 30, 2011. This balance of $5,900 is, reported on the November 30, 2011, balance sheet for NetSolutions as shown in Exhibit 6 of Chapter 1. (atte sarc nytt ey ae nat atenfranrsr teeny bans fear54 CChapter2. Analyzing Transactions In.an actual accounting system, more formal account form replaces the T account, Later in this chapter, a four-column account is illustrated. The T account, however, is a simple way to illustrate the effects of transactions on aecounts and financial state ‘ments, For this reason, T accounts are often used in business to explain transactions. Each of the columns in Exhibit 1 can be converted into an account form in a similar manner as was done for the Cash column of Exhibit 1. However, as mentioned. earlier, recording increases and decreases in accounts must follow certain rules, These rules are discussed after the chart of accounts is described Chart of Accounts A group of accounts for a business entity is called a ledger. A list of the accounts in the ledger is called a chart of accounts. The accounts are normally listed in the order in which they appear in the financial statements. The balance sheet accounts are listed frst, in the order of assets, liabilities, and owner's equity. The income state- ‘ment accounts are then listed in the order of revenues and expenses. Assets are resources owned by the business entity. These resources can be physical items, such as cash and supplies, or intangibles that have value. Examples of intangible assets include patent rights, copyrights, and trademarks. Assets also include accounts receivable, prepaid expenses (such as insurance), buildings, equipment, and land. Liabilities are debts owed to outsiders (creditors). Liabilities are often identified on the balance sheet by tiles that include payable. Examples of liabilities include accounts payable, notes payable, and wages payable. Cash received before services are delivered, creates 4 liability to perform the services, These future service commitments are called, unearned revenues. Examples of unearned revenues include magazine subscriptions received by a publisher and tuition received at the beginning of a term by a college. ‘Owner's equity is the owner's right to the assets of the business afterall liabili ties have been paid. For a proprictorship, the owner's equity is represented by the balance of the owner's capital account. A drawing account represents the amount of withdrawals made by the owner. Revenues are increases in owner's equity as a result of selling services or products to customers. Examples of revenues include Fees earned, fares earned, commissions revenue, and reat revenue. }NNNCeLONCAAT ‘THE HUACKING RECEIVABLE abe to come up with $2 milion, Eventual, the pilot talked ‘the hijackers into setting forthe $2 millon wien the plane ‘A company’s chart of accounts should reflect the basic na ture ofits operations. Occasionally, however, transactions ‘ake place that verse to unusual accounts. The folowing Isa story of one such account Before strict aport security was implemented across ‘the United States, several aiines experienced hijacking incidents. One such incidant occurred when 3 South ‘ery Airways DG en route from Memphis to Miami was hijacked during a stopover in Birmingham, Alabama, The ‘three hijackers boarded the plane in Birmingham armed ‘with handguns and hand grenades. At gunpoin, the hi- Jackerstook the plane the plane's crew and the passengers tonine American ctes,Teronto, and eventually to Havana, Cbs. During te long fight, the hijackers demanded a ran- som of $10 milion, Southern Always, however, was only landed in Chatanooga fo fueling. Upon landing in Havana, the Cuban authorities ar rested the hijackers and, after ale delay, sent the plan, passengers and crew backto the United States. The jac fs ane $2 millon stayed in Cuba, How did Southern Airways account fr and report the Injacing payment in its subsequent ancl statements? {As you might have analyzed, the intial entry credited Cash {or 32 millon. The debit was to an account eed "Hack- ing Payment This account was reported as a type of re: ‘cevable under “other assets’ on Southerns balance sheet. ‘The company maintained that it would be able to collect ‘the csh fom the Cuban government and tha, therefore, a receivable existed In fact, Souther Airways was repid $2 millon by the Cuban government, which was, at that tina, attempting to improve relations withthe United States.Chapter 2 AnalyzingTiansactions 55 Expenses result from using up assets or consuming services in the process of ‘generating revenues. Examples of expenses include wages expense, rent expense, luullities expense, supplies expense, and miscellaneous expense. ‘A chart of accounts should meet the needs of a company's managers and other users of its nancial statements, The accounts within the chart of accounts are num bered for use as references. A numbering system is normally used, so that new ac counts can be added without affecting other account numbers, Exhibit 2 is NetSolutions’ chat of accounts that is used in this chapter. Additional accounts will be introduced in later chapters, In Exhibit 2, each account number has ‘wo digits, The first digit indicates the major account group of the ledger in which the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, owner's equity; 4, revenue; and 5, expenses. The second digit indicates the location, Of the account within its group. te Assets 4. Revenue 1 Ge 41 Feestomed 12 Accounts Reciable 5. Expenses 14 Supplies 51 Wages Expense 15: Prepaid instance 152 RentExpense 7 and 54. Vales pense 18 OficeEqupment 55. Supple Expense 2. Usbies 58. icetaneous Expense 21 Accounts Payable 22 Uneamed ent 3. Owners Equity 31 CsCl. Captal 32 Cvs Gark Drawing Each of the columns in Exhibit 1 has been assigned an account number in the chart of accounts shown in Exhibit 2. In addition, Accounts Receivable, Prepaid Insurance, Office Equipment, and Uneared Rent have been added. These accounts will be used in recording NetSolutions’ December transactions, Double-Entry Accounting System Al businesses use what is called the double-entry accounting system. This system is based on the accounting equation and requires: 1. Every business transaction to be recorded in at least two accounts, 2. The total debits recorded for each transaction to be equal to the total credits recorded. ‘The double-entry accounting system also has specific rules of debit and credit for recording transactions in the accounts. Balance Sheet Accounts ‘The debit and credit rules for balance sheet accounts are as follows: “ASSETS ‘OwNER’S EQUITY ‘Asset Accounts + _Owner's Equity Accounts Debit for Creditfor —Debitfor Creditfor —_Debitfor Credit for Inereases(1) | decreases(-) decreases(-) | inereases(4) decreases ) | increases (4) ce amt’ acount runbers have over, 50 digs ore. AG's many afferent ‘operation nd eons Chart of Accounts for NetSolutions ira Dect it Jeurralingwansactions ‘ing the double entry accounting stem,56 chapter? Analyzing Transections Income Statement Accounts ‘The debit and credit rules for income statement accounts are based on their relation- ship with owner's equity. As shown on page 55, owner's equity accounts are increased by credits, Since revenues increase owner's equity, revenue accounts are increased, by credits and decreased by debits. Since owner's equity accounts are decreased by debits, expense accounts are increased by debits and decreased by credits, Thus, the rules of debit and credit for revenue and expense accounts are as follows: Income Statement Accounts Revenue Accounts Expense Accounts [oat | Seder Oebkor Getor cecreasest) | inresests) ——inceaer(s) | daceaees() Owner Withdrawals ‘The debit and credit rules for recording ones withdrawals are based on the effect of owner withdrawals on owner's equity. Since owner’s withdrawals decrease owner's, equity, the owner's drawing account is increased by debits. Likewise, the owner's drawing account is decreased by credits, Thus, the rules of debit and credit for the owner's drawing account are as follows: Drawing Account Debit for Credit for increases (4) | decrenses-) Normal Balances ‘The sum of the increases in an account is usually equal to or greater than the sum Of the decreases in the account. Thus, the normal balance of an account is cither a debit or credit depending on whether increases in the account are recorded as debits, or credits, For example, since asset accounts are increased with debits, asset accounts, normally have debit balances. Likewise, liability accounts normally have credit balances, ‘The rules of debit and credit and the normal balances of the various types of accounts are summarized in Exhibit 3. Debits and credits are sometimes abbreviated, as De. for debit and Cr. for credit, When an account normally having a debit balance has a credit balance, or vice versa, an error may have occurred or an unusual situation may exist. For example, a credit balance in the office equipment account could result only from an error. This, PE See State fr each account whether tis aly to hae (] debi ents ony, ced ents ony or) oth debt and ate Aie beat worl blanca tee fernien Dowel ain 2. Accounts Payable 5. Supptis 2. Gah Uli Expense ele cee eee 1. Debit entries only; normal debit balance 4. Credit enres only normal credit balance 2. Debit and crecitenties; normal credit balance 5, Debit and crit entries; norma debit balance 3. Debit and crit ents: normal debit balance 6. Debit entries only: normal debit balance Practice Exercises: PE 2-1A, PE 2-18CChapter2 AnabzingTransactions 57 EXHIBIT 3 Rules of Debit and Credit, Normal Balances of Accounts unpimies + OWNER'S EQUITY ability Accounts Owners Capital Account paaee ‘ret or ‘ation Debtor ecrsses() _—_decrssas(-) erases) Owner's Drawing Account Income Statement Accounts es “t Revenue Recounts decreases) Debitfor decreas ~ Expense Accounts ‘reifor decreases) “he sce ofthe secount or recoding crests ‘and the normal lances shown in aren, Netincome ornetloes is hecause a business cannot have more decreases than increases of office equipment. (On the other hand, a debit balance in an accounts payable account could result from, Aan overpayment, Journalizing Using the rules of debit and credit, transactions are initially entered in a record called, 4 journal. In this way, the journal serves as a record of when transactions occurred, and were recorded. To illustrate, the November transactions of NetSolutions from, Chapter 1 are used. Not. 1 Chris Clark deposited $25,000 in a bank account in the name of NetSolutions. Transaction A “This transaction increases an asset account and increases an owner's equity account, It is recorded in the journal as an increase (debit) to Cash and an Analysis increase (credit) to Chris Clark, Capital.58 Chapter? Analyzing Tansactions ‘journal can be thought fas bing smile to te nid ay of Sinifant dy today ie ‘The transaction is recorded in the journal using the following steps: Step 1. The date of the transaction is entered in the Date column, Step 2. The title of the account to be debited is recorded at the left-hand margin, under the Description column, and the amount to be debited is entered in the Debit columa. Step 3. The title of the account to be credited is listed below and to the right of the debited account ttle, and the amount to be credited is entered in the Credit column, Step 4. A brief description may be entered below the credited account. Step 5. The Post. Ref. (Posting Reference) column is left blank when the journal entry lly recorded. This column is used later in this chapter when the journal entry amounts are transferred to the accounts in the ledger. ‘The process of recording a transaction in the journal is called journalizing. The centry in the journal is called a journal entry. 1 2 4 ‘The following i a useful method for analyzing and journalizing transactions Carefully read the description of the transaction to determine whether an asset, a liability, an owner's equity, revenue, an expense, or a drawing account is affected For each account affected by the transaction, determine whether the account inereases for decreases, Determine whether each inerease or decrease should be recorded as a debit or a credit, following the rules of debit and credit shown in Exhibit 3. Record the transsction using a journal entry ‘The following table summarizes terminology that is often used in describing a trans- action along with the related accounts that would be debited and credited, Journal Entry Recount Common transaction terminology _ Debit Credit Received cash for services provided Cash Fees Eomed Services provided on account ‘Accounts Receivable Fees €amed Received cath on account can Accounts Receivable Purchased on account Asset Account ‘Accounts Payable Paid on acount ‘Accounts Payable cash Paid cash Asset or Expense Account Cash Over vestments CCashandiorctherasets (Overs Name), Capital (Owner withdrawals {Owners Name) Drawing Cash ‘The remaining transactions of NetSolutions for November are analyzed and jour- alized next ‘Transaction B Analysis Journal Entry Accounting “Equation Impact ‘Now. 5 NetSolutions pata $20,000 for tho purchase of land as a future building sit. ‘This transaction increases one asset account and decreases another. Itis recorded in the journal as a $20,000 increase (debit) to Land and a $20,000 decrease (credit) t0 Cash. wor. 5 | Land 20000 cash 20000 Purchased and for bling te, Aesets : Usbates + ownersEqutyCChapter2 AnalyzingTransactions 59 a Im cgetn yc mt e sages SS ‘Equation —— ai anil me en a ne wn See = = rn ‘This transaction increases various expense accounts and decreases an asset rig ne sum of the debits is always equal to the sum of the credits in a journal entry. It is — recorded in the journal with increases (debits) to the expense accounts (Wages . soe nt Nov. 30. Wages Expense “ .. 2125 “Miscellaneous Expense as Xe al Bete Paid expenses.60 Chapter? Analyzing Transactions ‘Transaction F Nov. 30 NetSolusions paid creditors on account, $950. ‘This transaction decreases a liability account and decreases an asset account. It Analysis is recorded in the journal as a $950 decrease (debit) to Accounts Payable and 1 $950 decrease (credit) to Cash, Nov. 30] Accounts Payable 950 Journal Entry ash 30 Paid creditors on secount Accounting Assets Usbitos ‘Owners Equity Equation ‘Impact ‘Transaction G Nov. 30 Chris Clark determined that the cost of supplies on band at November 30 was $550. ‘NetSolutions purchased $1,350 of supplies on November 10, Thus, $800 ($1,350. $550) of supplies must have been used during November. This transaction is Asalysis recorded in the journal as an $800 increase (debit) to Supplies Expense and an. {$800 decrease (credit) to Supplies. Nov. 30) supplies Expense 200 Journal Entry Supplies 00 ‘Supeles used during November. Accounting . abies Equation “Impact ‘Transaction H Nov. 30 Chris Clark withdrew $2,000 from NetSolutions for personal use. ‘This transaction decreases assets and owner's equity. This transaction is recorded Analysis in the journal as a $2,000 increase (debi to Chris Clark, Drawing and a $2,000 decrease (credit) to Cash. Debit Journal Entry | | *" ‘ow. | 20| chris Clark, Orawing 2000 cash 2000 ‘Chis Clark withdrew cash for parson use, Accounting Assets - abies + Onmers auity (Orang) Equation Impact ee ae eT a ‘WILL JOURNALIZING PREVENT FRAUD? ‘nile journaling transactions reduces the possibilty of system by creating fictious suppliers to whom checks are fraud, by no means eliminates For example, embezale- sued. ‘ment canbe hidden within the double-entry bookkeepingStep ‘Step 2. CChapter2. nating Transactions poate Debit creat Salances —Galances ash 206s AccounisRecewable 220 Supplies 2000 Prepaid Insurance. 2ac0 ind... - i. Sochecic 2000 Office Equipment 800 Pecounts Py 900 neared Rent saaasinees i 360 Chis Cla, capital 25900 (his Cla Drawing 4000 Fees Ened Si aeeeartii 16340 ‘ages Expense az7s Rent Expense 1600 User txpente 385 Supplies Expense 800 Nsclloneous Expense : ass ‘2600 2a Steps 3-4 ‘The trial balance shown in Exhibit 6 is tiled an unadjusted trial balance. This is to distinguish it from other trial balances that will be prepared in later chapters ‘These other trial balances include an adjusted tial balance and a post-closing trial balance. Errors Affecting the Trial Balance If the trial balance totals are not equal, an error has occurred. In this case, the error ‘must be found and corrected. A method useful in discovering errors is as follows: 1. If the difference between the Debit and Credit column totals is 10, 100, oF 1,000, an error in addition may have occurred. In this case, re-add the tial balance column totals, Ifthe error still exists, recompute the account balances, 2.1F the difference between the Debit and Credit column totals can be evenly divisible by 2, the error may be due to the entering of a debit balance as a credit balance, fr vice versa. In this case, review the trial hakance for account balances of one-half the difference that may have been entered in the wrong column. For example, if the Debit column total is $20,640 and the Credit column total is $20,236, the difference lof $404 ($20,640 ~ $20,236) may be due to a credit account balance of $202 that was tentered as a debit secount balance. 4. 1f the difference between the Debit and Credit column totals is evenly divisible by 9, trace the account balances back to the ledger to see if an account balance was incor- recly copied from the ledger. Two common types of copying errors are transpositions and slides, A transposition occurs when the order of the digits is copied incorrectly, Such as writing $542 as $452 or $524. In a slide, the entire number is copied incor rectly one or more spaces to the right or the left, such as writing $542.00 as $5420 fr $5,420.00. In both cases, the resulting error will be evenly divisible by 9. 4.18 the difference between the Debit and Gredit columa totals is not evenly divisible by 2 or 9, review the ledger to see if an account balance in the amount of the error tas been ‘omitted from the tral balance. Ifthe eror 15 of. diyaypet Journal postings to see t's posting debi or cred oY Lane BON Mee 2 headed tes eed chapter andthe pt dong el bse eed hater Teal Balance n NetSolutions Ceres72 chapter2 Analyzing Tansections 5. fan error is not discovered by the preceding steps, the accounting process must be retraced, beginning with the last journal entry ‘The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the credits are equal. This proof is of value, however, because errors often affect the equality of debits and credits. Example Exercise 2-6 For each of the following eros, considered individually, indicate whether the eror would cause the tral balance totals to.be unequal. the error would cauze the trial Balance totals #o be unequal indicate whether the debit or cect total Isigher and by how much '& Payment ofa cash withdrawal of $5,600 was jouralized and posted as a debit of $6500 to Salary Expense and a ret of $6.50 to Cash b. fee of $2850 eared from a cent was debited to Accounts Receivable for §2:580 and credited to Fees Earned for 523850, & Apayment of $3,500 10 a creitor as posted as a debit of $3,500 to Accounts Payable anda debit of $3,500 10 Caan ed 2. The totals are equal since both the debit and credit entries were journalized and posted for $6,500. 'b. The totals are unequal. The rei total is higher by $270 ($2,850 ~ $2580. The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500), Practice Exercises: PE2-6A, PE 2-68 Errors Not Affecting the Trial Balance ‘An error may occur that does not cause the trial balance totals to be unequal, Such, fan error may be discovered when preparing the trial balance or may be indicated, by an unusual account balance. For example, a credit balance in the supplies account indicates an error has occurred. This is because a business cannot have “negative” supplies. When such errors are discovered, they should be corrected. If the error hnas already been journalized and posted to the ledger, a correcting journal entry is normally prepared. To illustrate, assume that on May 5 a $12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500, This posting of the incorrect entry is shown in the following T accounts: Ineonece ‘Supplies Accounts Payable 72500 | 12500 Before making a correcting journal entry, it is best to determine the debit(s) and credit(s) that should have been recorded, These are shown in the following, T accounts: conect: office Equipment Accounts Payable nsf Comparing the two sets of T accounts shows that the incorrect debit to Sup- plies may be corrected by debiting Office Equipment for $12,500 and crediting Supplies for $12,500. The following correcting journal entry is then journalized and posted:CChapter2 AnalyzingTransactions 73 Entry Cree ro: May |31) Office Eauipment 1 | 12500 Supplies “ 2500 ‘to Supplies on May 5. Se invoice from Bellofice Equipment Co. Example Exercise 2-7 = ‘The following errors took place in journaling and posting transactions: '& withdrawal of $6,000 by Chest Ramey, omer ofthe business, was recorded asa debit to Office Salares Expense and a credit to Cash. Unites Expense of $4500 paid forthe current month was recorded asa debit to Miscellaneous Expense and @ ‘red to Accounts Payable. Journalize the entries to correct the ertors, Omit explanations. eee Cheri Ramey, Drawing. 6000 Office Salaries Expente. 6000 1. Accounts Payable nn m= 4500 ‘Niscelaneous Expense 4500 Usites Expense... 4500 a 4500 ‘Note:The frst entry in (b) reverses the incorrect entry, and the second entry records the correct entry. These two. entries could also be combined into one entry; however, preparing two entries will make it ease for someone later to ‘Understand what had happened and why the entries wore necessary. Practice Exercises: PE2-7A, PE 2-78 Financial Analysis and Interpretation: Horizontal Analysis es Descbe anc sng item na incl statement, schs net income, fen wef in interpreting the financial peformance ofs company. Hever a computson with por pesods S| ttn mas he Rana inrmaton even more wef For exam comping nt ey income oft cure! ped wiht net income with the por prod mil nde Sant ether the companys operating pefomance ha inproved Seem Inforizmtal sages the amnunt ofeach tem on core fnancl statement Sones i compared th ese tem oman caer Sater. The erase ot derease the amt of then computed oper ih te Percent of ease or decrease ‘hen two satement ar Beng compe the cre statement used a the base Tor computing the amount andthe pen of ange” CChapter2 Analyzing Transactions ‘To illustrate, the horizontal analysis of ewo income statements for J. Holmes, Attomney- attaw, is shown below 4.Molmes, Atomey-at Law Forte Years Ended December 31 Teens (Decrease) 2012 aon. “Amount Bercent Feaseamed ‘sa7s00 3150000 ‘57500 oN operating expenses: ‘Wages expense 5 69.000 5 45000 15000 33 Rent expense 15.000 12.000 3000 Bo ules expense 12500 ‘9000 3500 x89 Supplies expense 2.700 3,00 ‘eno, 09) Mscalaneous| capense 2300 1300 soo na “etal operating expenses T2500 Taa00 izo0 308 Netincome 595000 5.79200 siss00| 199 ‘The horizontal analysis for J. Holmes, Attorney-at-Law, indicates both favorable and unfavorable trends, The increase in fees earned is a favorable trend, as is the decrease in supplies expense. Unfavorable trends include the increase in wages ex- pense, utilities expense, and miscellaneous expense, These expenses increased the same as or faster than the increase in revenues, with total operating expenses increas- ing by 30.60%. Overall, net income increased by $15,800, or 19.9%, a favorable trend. “The significance of the various increases and decreases in the revenue and ex pense items should be investigated to sce if operations could be further improved. For example, the increase in utilities expense of 38.9% was the result of renting additional office space for use by a parttime law student in performing paralegal services. This explains the increase in rent expense of 25% and the increase in wages expense of 33.3%. The increase in revenues of 25% reflects the fees generated by the new paralegal ‘The preceding example illustrates how horizontal analysis can be useful in inter- preting and analyzing the income statement. Horizontal analyses can also be performed, for the balance sheet, the statement of owner's equity, and the statement of cash flows. To illustrate, horizontal anabfsid' Fie Mle c'¥ 2009"aiid 2008 statements of cash flows (in millions) is shown below. Ale Ine. Statements of Cash Flows For the Years Ended Sept.2 sept.27, (Decrease) 2009 aunt ‘Cosh flows rom operating ates 10359 $9596 3 50 Cesh hows used orivesing aces (17434) ues) (621s) ono) ‘Gash tows ram Bnancing sees ss 1s 453) os) Net increase (decreas) nash Sige F258 35) (e521) Beginning ofthe year balance of ash 11975 352 2523 20 nd ofthe year balance of ch 5523 miss Hera) sn ‘The horizontal analysis of cash flows for Apple Inc. indicates an increase in cash flows from operating activities of 5.9%, which is a favorable trend. At the same time, Apple increased the cash used in its investing activities by over 112.9% and decreased the cash it received from financing activites by 40.6%. Overall, Apple had a 362.1% decrease in cash for the year, which decreased the end of the year cash balance by. 55.7%. In contrast, in the prior year Apple increased its ending cash balance, which is the beginning cash balance of the current year, by 27%.CChapter2 Anabeing Transactions 75 Example Exercise 2-8 = “Two Income statements fr McCorkle Company ae shown below Mecorkle Company Income Statements forthe Years Ended December 31 2012 201 Fes eared sz10000 3175000 Operating expenses “vaso Netincome $3150 $ 25000 Prepare a hohzental analy of McCole Companys incme statements es IMecerkle Compeny Income Satemente For the Year Ended Decomber 31 Increase (Deeease) 201 an ‘amount Percent Fes eared e710 000 5175000 $3500, 20% Operating expenses "172500, 150000 22500, 5 Net income 57500 52500 312500 50 Practice Exercsas: PE 2-8A, PE 2-88 era a ae Key Points The simplest form of an account, account, has three pars (1 a ite, which isthe ame Df the Hem recorded in the account, 2) Tet sie, eile the debit side and (3) 2 nght se, called the ‘red side. Periodically, the debts in an account are added, the reds in the accouet are added, andthe flance of the account ie determined. The system of account that make up a ledger i called a chart of accounts Learning Outcomes ‘ample | Practice eee oes | xe + Determine the balance of a account + Prepare a chat of accounts fora proprictorsip.76 Chepter2_Anahzing Transactions Po SSS Key Points Transctons are inaly entered in reo calle! journal. The nies of debi and creat for recording increases or decreases in accounts are shown in Exhibit 3, Esch transition recorded =o tha the ‘um ofthe debs is alays equal tothe sum of the credis. The nonnal halance of an account i indicated By the side of the account (debtor eect) that receives the increas, Learning Outcomes ‘Example ‘Practice Ereriier | Gordes + Indicate the normal balance of an secout EERE | PERIA, 218 + Joumalize transactions using the rules of debit and ere. 22 | PR22a, 228 ey Points Transactions ae joumalized and pene to the ledgcr ting the rules of debit andl cre. The sts and credits foreach rural entry are pesed to the accounts inthe onde in which they occur Io the Jounal Learning Outcomes, ee a + Joumalze wansactions using the rules of debt ard cre. E23 | PER3A, 238 + Given ether account dats, determine the mising amount of an E24 | PED4A, 248 account ent. E25 | PERSA, 255 + Pos oumal entries to sandand account + Post ural ents to aT account [4 ener ere ester eee ete enn Key Ponts Atal halance is prepared by listing the accounts frm the ledger ad thei balances. The tts of the Debit column and Cred clin of the tal alance must be equal If the two totale are not cal, an eor has occurred, Hors may cecur even though the tel balance tals are equal, Sich es Hay require a corectingjounal coy ianing Outcomes ‘Pratiee + Prepare an unadjusted tial halance: ae + Discover emors that cause unequal toals in the tril balance, PEGA, 2468 + Prepare coneting ouralenties for various error PETA, 278CChapter2 Anabeing Transactions 77 Describe andillustrate the use of horizontal anayssin evaluating a company's performance eres Key Points In horizontal analysis, the amount of cach jem ce a curent financial statement compared wah the same item on an eae statement. The inerease cr decrease inthe amount ofthe Kem Is compute together wih the percent! of increase or decrease, When to statements are being compared, the eatir Sttemea’ ls used asthe base for computing te amount and the percent of change earning Outcomes Tempe ‘ratice os eerie: | Ever + Describe horizontal analysis + Prepare a horizontal analysis eport of imancial statement E28 | PERSA, 285 account (52) dewing 0) pasting 6D count recvable (5) ‘expenses (5) revenues (5) assets (54) hortaontal analysis (7) rules of debt and credit 5) Patance of the account (53) journal 67) slide 1) capital account 6) journal enty (58) account 62) hr of accounts (59) Journaling (8) transposon ‘cocecting journal entry (72) ledger (58) tial balance 0) cede 53) lnbltes 6 tude tial balance (71) sebie 53) normal balnce ofan account (56) uneamed revenue (63) doubleenry accounting system (5) owners equity GO DST R CC J. F, Outs, MD, has boon practicing as cardiologist for thee years, During April 2011, ‘Outz completed the Following transitions in hee practice of eardiology Ape 1. Paid office rent for Apel, $800. 3. Purchased equipment on account, § 5. Received cash on account from patients, $3,150 | Purchased Xceay film and other supplies on account, $265. ° ‘One of the items of equipment purchased on April 3 was defective. Ie was ro tuned with the perriasion of the supper, who syrecd ta reduce the account forthe amount charged for the item, $325, 12 Paid cash to creditors on account, $1,250. 10.CChapter2Anayzng ansactons ‘Ape. 17. Paid cash for renewal of six-month property insurance policy, $370. 20, Discovered thatthe halances ofthe cash account and the acount payable account fas of Apall 1 were overstated by $200. A payment ofthat amount toa creditor in March had not been recorded. Journalize the $200 payment as of pal 20 Paid cash for laboratory analysis, $545. ald cash fom business bank account for personal and family expenses, $1,250, Recorded the cash received in payment of serves Cn a ash basi) to patients during Apel, $1,720. Paid salaries of eceptionst and nurses, $1,725 Paid various uty expenses, $360. Recorded fees charged to patients on account for services performed in April, $5 30. Paid miscellaneous expenses, $132. rem Es ‘Out's account tes, numbers, and balances as of April 1 (all normal balances) are lst as follows Cash, 11, $4,128; Accounts Receleable, 12, $6,725; Supplies, 13, $29; Prepaid Insurance, 14, $465; Equipm 18, $19.745, Accounts Payable, 22, $765]. F ‘Outs, Capi, 31, $30,383; J. FOutz, Drawing, 42, $0; Profesional Fees 4, $0; Salary Expense 5, $0; ent Expense, $3, $0; Laboratory Expense, 55, $0, Uiles Expense, 55, 8; Miscellaneous Expense, 59, $0. Instructions 3 4 Open a ledger of standard fouscolumn sccoures for De. Outs as of Apel 1. Eater the balances inthe appropriate balance columns and place a check mark () inthe Posting Keference cokuma (Hint. Very the equality ofthe debit and credit balances fn the ledger before proceeding withthe next iastvction ) Jouenalize each transaction in a two-colisan journal, ‘Pos the Journal to the ledge; extending the monthend Dalances to the appropriate balance columns after each posting Prepare an unadjusted tial balance as of April 30Solution 1., 2, and 3 ate Destin or 1} ant pene aldticn meer pi | Ecipment Accom Fyate Purchased equipment | sveptes Recount Pyabe Prcsed supp | account Payee Equipment aunt 1 Prepsitnsrnee cam Renewed sc month propery pote 20| coun Payable payment credter CChapter2._Anabzing Transactions in “LF Outewahren ‘sn or personals sas Paleo a0 rotesional ees Record ee etme 30) micetaneous expense 1250 sus ~ an80° Capter2_Anabaing Transactionsa CChapter2__Ana}yzing ansactons suppes Prep surance 1.0, cata! {Fux orang Proesional res Solry pense. ent fence ues Expense Discussion Questions “What Is the difference berween an account and a ledger? Do the terms debit and credit signify increase or decrease or can they signify either? Explain, ‘Weis Company adheres to a policy of depositing al cash receipts ina bank account and malig All payments by check. The cash account a5 of December 31 hs a credit halance of $3,190, and there is no undeposited eash on hand (2) Assum- Ing no emors occurred during journalzing o& post fing, what caused this unusual balance? (b) Is the {$3,190 credit balance inthe cash account an ase, lability, owners equity, a revenve, or an expense? Resource Services Company performed services In Pebeuary Tor 2 specifi customer, for a fee (of $11,250. Payment was received the following ‘March. (a) Was the revenue eammed in February oF ‘Maret? qb) What accounts should be debited 2nd creed in (1) February and (2) March? IF the wo totals of a tal balance are equal, does it mean that there are no errors inthe accounting records? Explain. Assume that atrial alance is prepared with an account balance of $21,740 listed as $2174 and an Account balance of $4,500 listed as $5,400. entity the tanspostion and the slide eet nr wo. rere} falances —Balmces 2381 ns tas Assume that when a purchase of supples of $3,100, for cash was recorded, both te det and the eed. ‘were jaumalzed and posted as $1,300. @) Would this error cause the tal balance to be out of bal ance? (b) Would the tal balance be out of balance IF the $5,100 enty had been jouralized comecty Dur the credit wo Cash had been posted as $1,300? Assume that Timberline Consisting erroneously re ‘corded the payment of $900 of owner withdraw ls as 4 debit to Salary Expense. (a) How would {his eror affect the equality ofthe wal balance) How would ths enor affea the income statement, ssatement of owners equity, and balance sheet? Assume that Westesn Realty Co. borrowed $200,000, from Mountain First Bank and Trt I recording the wansaction, Wester erroneously recorded the receipt as. debit 1 Cash, $200,000, and a credit to Fees Earned $200,00. (a) How would this error tect the equally of the tll balance? 6) How ‘would this eo fect the income statement, state- iment of owner's equity, nd balance sheet Checking accounts are the mest common form of ‘poste for banks. Assume that Vilage Sorage thas a checking account at Camino Savings Bank. What type of account asset, lability, owner's tity, revenue, expense, drawing) does the account balance of $8,750 represent fom the viewpoint of G) Village Storage and b) Camino Savings Bask?£2 Chapter? AnahzingTansactons Practice Exercises (002 Ge21 5 PE21A_ Rules debit and credit and normal balances State foreach account whether itis likely to have (a) debit enties only, (b) credit entries nly, oF (@) both debit and credit entles, Also, Indicite ls pormal balance 1. Accounts Receivable 4. Paul Howe, Capital 2. Commissions Eamed 5. Rent Revenue 3. Notes Payable 6. Wages Expense (001.2462) PE2IB_ Rules of debit and credit and normal balances State foreach account whether i is likely to have (@) debit ents only () exe entees fnly, or (6) both debit and credit entries, Aso, indicate its norma balance. 1. Accounts Payable 4. tscellaneous Expense 2 Cash 5. Insurance Expense 5. Malissa Wabl, Drawing 6. Fees Earned (08.222 ps) PE22A_ Journal entry forasset purchase Prepare 2 joumnal entry forthe purchase of office equipment on March 4 for $27,150, paying $5,000 cash and the reminder on account (001.2422 5) PE22B Journal entry for asset purchase repare a journal entry for the purchase of ice supplies on August 7 for $4,000, $1,000 cash and the remainder on account ying (001.2 ge23 50) PE23A. Journal entry for fees earned Prepare a journal entry on September 6 for fees eared on sccount, $8,000 (001.2 ae22 50) PE23B Journal entry for fees earned: repare a journal entry oa May 29 for eash received for services rendered, $5,000. 001.2 4824 50) PE24A Journal entry for owners withdraw repare 2 journal entry on December 22 for the withdawal of $10,000 by Jason Von Petz for personal use 001.2 se24 50) PE2-4B Journal entry fr owners withdrawal repare & journal entry on Februry 3 for the withdrawal of $7,500 by Allene Collette for personal usejets ons. ons. oni. Eos BEDS pos E26 92 E27 973 E28 575 CChapter2 Analyzing Transactions 83 PE2-5A Missing amount from an account (On June 1, the cash account balance was $17,200. During June, eash payments totaled {$178,300, and the June 30 halance was $23,000. Retormine the cash receipts during Jun. PE2-5B Missing amount from an account (On October 1, the supplies account balance was $900. During October, supplies of $2,750 were purchased, and $1,025 of supplies were on hand as of October 31. Determine sup- plies expense for October. PE2-6A Trial balance errors For each of the following errors, considered individually, indicate whether the error would ‘cause the trial balance totals 9 be unequal. IF the error would cause the tial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much, 4. The payment of an insurance premium of $4,800 for a two-year policy was debited to Prepaid Insurance for $4,800 and credited to Cash for $8,400. . A payment of $318 on account was debited to Accounts Payable for $381 and credited to Cash for $381, ©. A purchase of supplies on account for $1,200 was debited to Supplies for $1,200 and debited to Accounts Payable for $1,200. For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals (0 be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. ‘The payment of cash for the purchase of office equipment of $15,000 was debited to Land for $15,000 and credited to Cash for $15,000. b. The payment of $5,200 on account was debited to Accounts Pa credited to Cash for $5,200. © The receipt of cash on account of $1,270 was recorded as a debit to Cash for $1,720 and a credit to Accounts Receivable for $1,270. ble for $520 and PE2-7A Correcting entries ‘The following errors took place in jourmalizing and posting transactions: a. Advertising expense of $2,700 paid for the current month was recorded as a debit to Miscellaneous Expense and a eredit to Advertising Expense, . The payment of $3,950 from a customer on account was recorded as a debit to Cash, ‘and a credit to Accounts Payable, Joumalize the entries to correct the errors, Omit explanations PE 278 Correcting entries ‘The following errors took place in journalizing and posting transactions: 4. The receipt of $5,800 for services rendered was recorded as a debit to Accounts Re- ceivable and a credit 10 Fees Earned, b. The purchase of supplies of $1,800 on aecqust;wapisecorded as a5 debit to Office Equipment and a credit to Supplies. Jouralize the entries to correct the errors, Omit explanations PE2-8A Horizontal analysis ‘Two income statements for Boyer Company are shown on the following page.@4 chapter 2 Analyzing Transactions ofeawes Berckes Beyer Company Income Sentemens For ears Ended December $315,000 5138.500, Prepare a horizontal analysis of Boyer Company's income statements. Fees eamed ‘Operating expenses Netincome £62097) PE28B Horizontal analysis ‘Two income statements for Hitt Company are shown below. He Company Fees earned s937500 750000 ‘Operating expenses “612500 500000 Netincome 3325000 5250000 Prepare a horizontal analysis of Hit Companys income statements X21 Chart of accounts ‘The following accounts appeared in recent financial statements of Continental Asines: Account Payable Fight Equipment ira Labaty Landing Fees Expense) ‘irraftFuel Expense Passenger Revenue Cargo and all Revenve Commissions (Expense) Purchase Depots fr Fbght Equipment ‘Spare Parts and Supplies Identify each account as either a balance sheet account or an income statement account. For each balance sheet account, identify it as an asset, a liability, or owner's equity. For each income statement account, identify it as a revenue or an expense. ons. X22. Chart of accounts Innerscape Interiors is owned and operated by Jean Carter, an interior decorator. In the ledger of Innerscape Interiors, the first digit of the account number indicates its ‘major account classification (I—assets, 2—liabilities, 3—owner's equity, 4—reveaues, ‘5 expenses). The second digit of the account number indicates the specific account ‘within each of the preceding major account classifications. Mateh each account number with its most likely account in thelist below. The acount numbers are 11, 12, 13, 21, 31, 32, 41, 51, 52, and 53. ‘Account Payable Jeon Cartier, Drawing ‘ecountsRecehable Land cosh ‘Miscellaneous Expense Fees amed Suppis Expense JeanCarverCaptal Wages Expense ont X23 Chart of accounts Alpha School is a newly organized business that teaches people how to inspire and influence others. The list of accounts to be opened in the general ledger is as follows:onn2 on. osn.12 0.2 Chepter2 AnalyzingTransactions 85 Accounts Payable Miscotancous pense ‘ecountsRecehable Prep insurance cash eat Expense Eauipment Supplies Fees amed Supplies Expense an Pulver, Capital Uncarned Rent Jan Pulver Drawing Wages Expense List the accounts in the order in which they should appear in the fedger of Alpha School and assign account aumbers. Each account number is to have two digits: the firs digit is to indicate the major classification (for assets, et), and the second digit isto identify the specific account within each major classification (11 for Cash, ete). X24 Rules of debit and credit ‘The following table summarizes the rules of debit and credit. For each of the items (a) through (), indicate whether the proper answer is a debit or a credit Increase _Decrense Norte Galonce Tslnee sheet secon ‘Asset @ Cede sary cee) ‘a ‘Owners equity: Capital creat) © Drawing @ Ww 0 Income totement accounts: Revere a) w Expense creat bebe EX 2-5 Normal entries for accounts During the month, Iris Labs Co. has a substantial number of transactions affecting each of the following accounts, State for exch account whether it is likely to have (a) debit entries only, (b) credit enties only, oF (¢) both debit and credit entries. 1. Accounts Payable 5. Insurance Expense 2. Accounts Receivable 6. Nicki Swanson, Drawing 3. Cash 7. Uillidies Expense 4. Fees Earned EX 2-6 Normal balances of accounts Identify each of the following accounts of Advanced Services Co. as asset, Habi equity, cevenue, oF expense, and state in each case whether the normal balance is a debit ona credit. a. Accounts Payable f, Fees Earned b. Accounts Receivable 2 Office Equipment Barbara Mallary, Capital 1 Rent Expense 4. Barbara Mallary, Drawing 1. Supplies fe. Cash j. Wages Expense X27 Transactions CChalet Co. has the following accounts in its ledger: Cash; Accounts Receivable; Supplies; Oifice Equipment; Accounts Payable; Andee Freese, Capital; Andee Freese, Drawing; Fees Earned; Rent Expense; Advertising Expense; Usltes Expense; Miscellaneous Expense, Journalize the following selected transactions for October 2012 in a two-columa journal Journal entry explanations may be omitted.86 Chapter2 Analyzing Transactions os1.23 on.23 oni23 on.123 vc $284,175 Oct. 1. Paid rent for the month, $2,000 2. Paid advertising expense, $900. 5. Paid cash for supplies, $1,300. 6. Purchased office equipment on account, $16,000. 10, Received cash from customers on account, $6,700. 15, Paid creditor on account, $1,200, 27. Paid cash for repairs to office equipment, $600. 30. Paid telephone bill for the month, $180, 31, Fees earned and billed to customers for the month, $26,800 31. Paid electricity bill forthe month, $400. 31. Withdrew cash for personal use, $3,000. 2-8 Journalizing and posting (On February 3, 2012, Wileo Co. purchased $3,250 of supplies on account. In Wileo Cos ‘hact of accounts, the supplies account is No. 15, and the accounts payable account is No.2 a. Journalize the February 3, 2012, transaction on page 19 of Wilco Co.'s two-columa journal Include an explanation of the entry , Prepare a four-column account for Supplies. Enter a debit balance of $975 as of February 1, 2012, Place a check mark (Y) in the Posting Reference column, Prepare a fourcolumn account for Accounts Payable. Enter a credit balance of $13,150 as of February 1, 2012. Place a check mark (¥) in the Posting Reference columa, dd. Post the February 3, 2012/ransaerton othe eacunts €. Do the niles of debit and credit apply to all companies? 2-9 Transactions and T accounts “The following selected transactions were completed during August of the current year: Billed customers for fees earned, $35,700. Purchased supplies on account, $2,000. Received cash from customers on account, $26,150. Paid creditors on account, $800. |. Journalize the above transactions in a two-column journal, using the appropriate num ber to identify the transactions. Journal entry explanations may be omitted. Post the entries prepared in (a) to the following T accounts: Cash, Supplies, Accounts Receivable, Accounts Payable, Fees Earned, To the left of each amount posted in the accounts, place the appropriate number to identify the transactions, Assume that the unadjusted trial balance on August 31 shows a credit balance For [Accounts Receivable. Does this credit balance mean an error has occurred? 2-10 Cash account balance During the month, Lathers Co. received $400,000 in cash and paid out $290,000 in cash. 4. Do the data indicate that Lathers Co, had net income of $110,000 during the month? Explain D. If the balance of the cash account is $185,000 at the end of the month, what was the cash balance at the beginning of the month? X21 Account balances 4. During October, $90,000 was paid to creditors on account, and purchases on account ‘were $125,000. Assuming the October 31 balance of Accounts Payable was $40,000, determine the account balance on October 1 . On May 1, the accounts receivable account balance was $25,000. During May, $240,000 ‘was collected from customers on account. Assuming the May 31 balance was $36,000, ‘determine the fees billed to customers on account during May,08.12 on ¥ Total Debit column: $363,900 0.4 ¥ Tota of Creat feolumn: $431,400 Chepter2 AnalyzingTransactions 87 6 On November 1, the cash account balance was $18,275, During November, cash receipts totaled $279,100 and the November 30 balance was $13,200. Determine the ‘cash payments made during November. EX2-12 Capital account balance As of January 1, Brenda Cikan, Capital, had a credit balance of $125,000, During the year, ‘withdrawals totaled §7,000, and the business incurred a net loss of $130,000, 4. Compute the halance of Brenda Cikan, Capital, as of the end of the year. Assuming that there have been no recording errors, will the balance sheet prepared at December 31 balance? Explain, £2.13 Identifying transactions Southwest Tours Co. isa travel agency. The nine transactions recorded by Southwest Tours during May 2012, its first month of operations, are indicated in the following TT accounts: cast Equipment Mickey Oat Drawing WW ¥oeo | a 2000 18000 4000 reco |) 3.600 @ 270 © 9000 4000 Accounts Receivable ‘Account Payable Service Revenue 13500 | m — T0000 Te 9000] @) 1400 8) 18500 so Mickey Oat capital Operating Expenses @ 200) 1050 a) a0p00 «2700, @ 1050 Indicate for each debit and each credit: (2) whether an asset, ability, owner's equity, drawing, revenue, or expense account was affected and (b) whether the account was increased (+) or decreased (-). Present your answers in the following form, with transac tion (1) given as an example: Account Debited Account Credited ‘ranssction Type ye set + ‘ownersequty + EX2-14 Journal entries Pased upon the T accounts in Exercise 2-15, prepate the nine journal entries from which the postings were made. Journal entry explanations may be omitted EX2-15 Trial balance ‘Based upon the data presented in Exercise 2-13, (a) prepare an unadjusted trial balance, listing the accounts in their proper order. (b) Based upon the unadjusted trial balance, determine the net income oF net loss. EX2-16 Trial balance ‘The accounts in the ledger of Diva Co. as of July 31, 2012, are listed in alphabetical ‘order as follows. All accounts have normal balances. The balance of the eash account has. been intentionally omitted,88 chapter? on. oan. Total of Credit ‘column: $225,000 ‘Analyzing Transactions Accounts Payable $ 28000 Notes Payable $ 50000 Accounts Recelvae 40000 Prepadinsurance 5400 cash 7 Rent Expense 35000 ‘Chery Sievert Capital 49900 Supplies 4000 ‘Cher Sievert Drawing —_2500——Supplles Expense 9,000, Feos Earned 350600 UncamedRent 13,500, Insurance Expense 15000 Utities Expense 185000, Lind 125000 Wages Expense 195,000, Miscellaneous Expense 12000 Prepare an unadjusted trial balance, listing the accounts in their normal order and insest- ing the missing figure for cash EX 2-17 Effect of errors on trial balance Indicate which of the following errors, each considered individually, would cause the ‘rial balance totals to be unequal a. A fee of $15,000 earned and due from a client was not debited to Accounts Receivable fr credited to a revenue account, because the cash had not been received. A receipt of $6,000 from an account receivable was journalized and posted as a debit (of $6,000 to Cash and a credit of $6,000 to Fees Eamed. A payment of $1,200 (0 a creditor was posted as a debit of $1,200 to Accounts Pay- able and a debit of $1,200 to Cash. 4d. A payment of $10,000 for equipment purchased was posted as a debit of $1,000 to [Equipment and a credit of $1,000 to Cash. ce. Payment of a cash withdrawal of $10,000 was journalized and posted as a debit of $1,000 to Salary Expense and a credit of $10,000 to Cash. Indicate which of the preceding errors would require a correcting entry. 2-18 Errors in trial balance ‘The following preliminary unadjusted tral balance of Seats-For-You Co., a sports ticket agency, docs not balance: SeateForvouce, Unacjsted Tal lance ‘Maren 31,2012 Debit red alences —_—_Saances Ga 33000 Accounts Recevabl, 17.300 Prepaid insurance 3000 Equlpment, 7500 ‘Accounts Payable 16500 Uneared Ret. 1,600 Gina Ness, Capital 170 ‘ira Ness, Drawing 13000 Service Revenue 125,000 Wages Expense 60000 Advertsing Expense - ‘ 11300 -Micellancous Expense : : 15400 29300 Bs ‘When the ledger and other records are reviewed, you discover the following: (1) the debits and credits in the cash account total $98,000 and $82,500, respectively; (2) a billing fof $8,000 to a customer on account was not posted to the accounts receivable account; @) a payment of $3,600 made to a creditor on account was not posted to the accounts payable account; (1) the balance of the unearned rent account is $5,400; (5) the correct balance of the equipment account is $75,000; and (6) each account has 2 normal balance. Prepare a corrected unadjusted trial balance.ons Total of Credit ‘column: $750,000 CChapter2 Analyzing Transactions 69 EX 2-19 Effect of errors on tral balance ‘The following errors occurred in posting from a two-column journal: 1. A credit of $7,150 to Accounts Payable was not posted. 2. An entry debiting Accounts Receivable and crediting Fees Eaened for $11,000 was not posted ‘A debit of $1,000 to Accounts Payable was posted as a credit. A debit of $800 to Supplies was posted twice. A debit of $900 to Cash was posted to Miscellaneous Expense. A credit of $360 to Cash was posted as $630, [A debit of $9,420 to Wages Expense was posted as $9,240, Considering each case individually (Le, assuming that no other errors had occurred), Indicate: (@) by *yes’ or “no” whether the trial balance would be out of balance; ¢b) it answer to (a) is "yes," the amount by which the trial balance totals would differ, and (© whether the Debit or Credit column of the tral balance would have the larger total Answers should be presented in the following form, with error (1) given as an example: ® ® @ for Outot Balance Difference Larger Total 1 ves $7150 debt EX 2.20 Errors in trial balance entify the errors in the following trial balance. All accounts have normal balances. Divetin co. Debit Credit Balances _ Balances co - 2 mn 45,00 ‘Accounts Receable, 98400 Prepaid insurance 2,400 Equipment 220000 ‘Accounts Payable . 11,100 Salaries Payable : ‘venigrsetsntvs tar-ro-i6.36 7809 en Fre, pia 238,200 en Frye, Drawing se.000 service Revenue 470 Salary Expense. 195860, averting Expense 43,200 Mucellaneous Expense 3910 Figs00 56500 EX 2-21 Entries to correct errors ‘The following errors took place in journalizing and posting transactions: 1. Rent of $12,500 paid for the current month was recorded as a debit to Rent Expense and a credit to Prepaid Rent b. A withdrawal of $7,500 by Trent Benedict, owner of the business, was recorded as a debit to Wages Expense and a credit to Cash Joumnalize the entries to correct the errors. Omit explanations. EX 2-22. Entries to correct errors “The following errors took place in jourmalizing and posting transactions: a. Cash of $12,975 received on account was recorded as a debit to Fees Earned and a credit to Cash, b. A $3,200 purchase of supplies for cash was recorded as a debit to Supplies Expense and @ eredit to Accounts Payable, Journalize the entries to correct the errors. Omit explanations.90 Chapter2 Analyzing Transactions EX 2-23 Horizontal analysis of income statement ‘he following data (in millions) is taken fom the nancial statements of Target eo Corporation. els vee eas Seaasr Tealoperting epee cose s8o0s 4. For Target Corporation, comparing 2009 with 2008, determine the amount of change in millions and the percent of change for 1. Nef sales (revenues) 2, Total operating expenses b, eee What conclusions can you draw from your analysis of the met sales and the total operating expenses? ons.5 £X2-24 Horizontal analysis of income statement “The following data were adapted from the financial statements of Kmart Corporstion, prior z 8 to its fling for bankruptey: ons For yarsending January 3 3000 1988 es $3r028 $3592 Cost of sles (expense) (23658) @.111) Solin general and administratve expenses _(7415) (6514) (Operating income (ose Ew) F130 4, Prepare a horizontal analysis for the income statement showing the amount and per. ‘cent of change in each of the following: 1. Sales 2. Cost of sales 3, Selling, general, and administrative expenses 4. Operating income (loss) . Comment on the results of your horizontal analysis in part (a). fated eee oni 234 PR2-1A Entries nto T accounts and tial balance V7 3-Total of Debit Leila Durkin, an architect, opened an office on May 1, 2012. During the month, she com- olumn: $78,350 pleted the following transactions connected with her professional practice: 4. Transferred cash from a personal bank account to an account to be used for the busi- ness, $30,000. Db, Paid May rent for office and workroom, $3,500. Purchased used automobile for $25,000, paying $5,000 cash and giving a note payable for the remainder. 4. Purchased office and computer equipment on account, $9,000. . Paid cash for supplies, $1,200. {Paid exsh for annual insurance policies, $2,400. & Received cash from client for plans delivered, $8,150 1h, Paid cash for miscellaneous expenses, $300 4. Paid cash to creditors on account, $2,500. j. Paid installment due on note payable, $400 k, Received invoice for blueprint service, due in June, $1,200. Recorded fee eared on plans delivered, payment to be received in June, $12,900. 'm, Paid salary of assistant, $1,800. 1 Paid gas, ol, and repairs on automobile for May, $600.